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, 1997
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 (I.R.S. Employer
organization) Idenfication No.)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
(Address of principal executive offices) (Zip Code)
(931) 388-3145
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by
non-affiliates of First Farmers and Merchants Corporation at
March 6, 1998, was none.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the
issuer's common stock, as of March 6, 1998. 1,400,000 shares
This filing contains 68 pages.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 1997 Annual Stockholders Meeting of
April 21, 1998. -- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31,
1997. -- Parts I and II
KRAFTCPAS
Kraft Bros., Esstman
Patton & Harrell, PLLC
Certified Public Accounts
Member BKR International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Farmers and Merchants Corporation
Columbia, Tennessee
We have audited the accompanying consolidated balance sheets of
First Farmers and Merchants Corporation (the "Corporation") and
its wholly-owned subsidiary, First Farmers and Merchants
National Bank (the "Bank") as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders'
equity, and cash flows for the each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting
principles.
/s/ Kraft Bros., Esstman, Patton, & Harrell, PLLC
Nashville, Tennessee
February 6, 1998
1200 Parkway Towers
404 James Robertson Parkway
Nashville, TN 37219-1598
(615) 242-7351 * FAX 256-1952
Also in Columbia, Tennessee
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
Report of Management
Financial Statements
The accompanying consolidated financial statements and the
related notes thereto have been prepared by the management of
First Farmers and Merchants Corporation (the "Corporation")
including the Corporation's only subsidiary, First Farmers and
Merchants National Bank, in accordance with generally accepted
accounting principles and, as such, include amounts, some of
which are based on judgments and estimates by management.
Management's Discussion and Analysis appearing elsewhere in this
Annual Report is consistent with the contents of the financial
statements.
Kraft Bros., Esstman, Patton and Harrell, PLLC, the
Corporation's independent auditors, have audited the
accompanying consolidated financial statements, and their report
thereon is presented herein. Such report represents that the
Corporation's consolidated financial statements, provided in
this Annual Report, present fairly, in all material respects,
its financial position and results of operation in conformity
with generally accepted accounting principles.
Internal Control Over Financial Reporting
Management of the Corporation is responsible for establishing
and maintaining an effective internal control system over
financial reporting presented in conformity with generally
accepted accounting principles. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies
identified.
The Audit Committee of the Board of Directors is composed of
directors who are not officers or employees of the Corporation.
The Audit Committee of the Board of Directors is responsible for
ascertaining that the accounting policies employed by management
are reasonable and that internal control systems are adequate.
The Internal Audit Department conducts audits and reviews of the
Corporation's operations and reports directly to the Audit
Committee of the Board of Directors.
There are inherent limitations in the effectiveness of any
internal control system, including the possibility of human
error and the possible circumvention or overriding of controls.
Accordingly, even an effective internal control system can
provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in
conditions, the effectiveness of an internal control system may
vary over time.
Management assessed the Corporation's internal control system
over financial reporting presented in conformity with generally
accepted accounting principles as of December 31, 1997. This
assessment was based on criteria for effective internal control
over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management believes that, as of December 31,
1997, the Corporation maintained an effective internal control
system over financial reporting presented in conformity with
generally accepted accounting principles.
/s/ Waymon L. Hickman /s/ Patricia N. McClanahan
Waymon L. Hickman Patricia N. McClanahan
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Columbia, Tennessee
February 6, 1998
<PAGE>
KRAFTCPAs
Kraft Bros., Esstman
Patton & Harrell, PLLC
Certified Public Accounts
Member BKR International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Farmers and Merchants Corporation
Columbia, Tennessee
We have examined management's assertion, included in the
accompanying Report of Management-Internal Control System Over
Financial Reporting, that as of December 31, 1997, First
Farmers and Merchants Corporation maintained an effective
internal control system over financial reporting presented in
conformity with generally accepted accounting principles.
Our examination was made in accordance with standards
established by the American Institute of Certified Public
Accountants and, accordingly, included obtaining an
understanding of internal control structure over financial
reporting, testing, and evaluating the design and operating
effectiveness of the internal control structure, and such other
procedures as we considered necessary in the circumstances.
We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control
structure, errors or irregularities may occur and not be
detected. Also, projections of any evaluation of the internal
control structure over financial reporting to future periods are
subject to the risk that the internal control structure may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management's assertion referred to above is
fairly stated, in all material respects, based on the criteria
described in Internal Control --Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
February 6, 1998
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 a part of the Annual Report to
Stockholders which is included in this filing.
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, 1997, 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 fifteen (15) 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 and Crockett 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. At December 31, 1997, approximately $8.9
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
Securities
Investments are classified in three categories and accounted
for as follows:
Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Debt and equity securities that are bought and held
principally for the purpose of selling them in
<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)
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 deferred
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 payoff generally are
stated at their outstanding unpaid principal balances net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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.
When a loan is collateral dependent, impairment is measured
based on the observable market price or the fair value of the
collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Interest on loans is accrued 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 nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment. Interest income on loans in
nonaccrual status is recognized only to the extent of the excess
of cash payments received over principal payments due.
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 $410 thousand at December 31, 1997, and $450
thousand at December 31, 1996.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through
provisions for loan losses charged against income. Loan quality
is monitored by Loan Review and
<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)
the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and
subsequent recoveries, if any, are credited to the allowance
account in the period such determination is made. The adequacy
of the allowance for possible loan losses is evaluated quarterly
in conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1997 - $182,613; 1996 - $224,212; and 1995 - $168,020.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share". which supersedes APB Opinion No.
15. This statement requires the presentation of earnings per
share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Because the
Corporation has no potential common stock outstanding, it is
required to present only basic earnings per share and its
presentation of earnings per share will not change. Earnings
per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each
period presented.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $116,315,234 and
$103,540,673 at December 31, 1997 and 1996, respectively (fair
value: 1997 - $117,969,544; 1996 - $104,061,311), 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, 1997, 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
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337,240 $ 233,853 $ 14,893 $ 22,556,200
U.S. Government agencies 23,834,686 53,172 92,413 23,795,445
Other securities 2,749,094 422,591 2,000 3,169,685
$ 48,921,020 $ 709,616 $ 109,306 $ 49,521,330
Held-to-maturity securities
U.S. Treasury $ 10,432,892 $ 209,508 $ - $ 10,642,400
U.S. Government agencies 36,552,480 657,930 2,048 37,208,362
States and political
subdivisions 48,465,174 1,218,108 12,144 49,671,138
Other securities 815,421 33,735 - 849,156
$ 96,265,967 $ 2,119,281 $ 14,192 $ 98,371,056
December 31, 1996
Available-for-sale securities
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
<FN>
<F1>
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, 1997, 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, 1997, 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 $11,008,435, $3,020,054, and
$7,306,453 during 1997, 1996, and 1995, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$32,386,811, $56,112,000, and $18,848,992 during 1997, 1996, and
1995, respectively. Gross gains of $489,697 and gross losses of
$1,725 were realized on dispositions in 1997. There were no
realized gains or losses in 1996. Gross gains of $1,182 and
gross losses of $-0- were realized on the dispositions in 1995.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 8,051,787 $ 8,049,800 5.5%
After one but within five years 14,285,453 14,506,400 6.2%
U.S. Government agencies
Within one year 3,994,953 3,999,700 6.1%
After one but within five years 19,585,333 19,541,020 5.8%
After ten years 254,400 254,725 6.1%
Other securities 2,749,094 3,169,685 9.0%
$ 48,921,020 $ 49,521,330
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,432,892 $ 10,642,400 6.4%
U.S. Government agencies
Within one year 2,999,150 2,997,100 5.4%
After one but within five years 18,669,684 19,008,962 6.6%
After five but within ten years 14,883,646 15,202,300 6.5%
States and political subdivisions
Within one year 3,239,829 3,286,218 9.3%
After one but within five years 13,595,854 13,865,175 7.7%
After five but within ten years 18,510,918 18,983,557 7.4%
After ten years 13,118,573 13,536,188 7.8%
Other securities
After one but within five years 315,421 323,206 8.0%
After five but within ten years 500,000 525,950 7.3%
$ 96,265,967 $ 98,371,056
<FN>
<F2>
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>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 60,592,529 $ 54,565,335
Tax exempt municipal loans 768,125 605,933
Real estate
Construction 5,861,866 8,751,021
Commercial mortgages 52,968,199 46,114,930
Residential mortgages 146,768,418 125,854,753
Other 5,869,654 7,115,749
Consumer loans 58,879,231 60,993,583
331,708,022 304,001,304
Less:
Net unamortized loan origination fees (347,839) (269,260)
Allowance for possible loan losses (2,943,000) (2,926,063)
$ 328,417,183 $ 300,805,981
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1997
and 1996
</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 $ 78,350 $ 47,052 $ 40,499 $ 165,901
Variable rate loans 93,752 30,484 41,571 165,807
$ 172,102 $ 77,536 $ 82,070 $ 331,708
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1997
</FN>
</TABLE>
Loans having recorded investments of $2,954,000 at December
31, 1997, have been identified as impaired. The total allowance
for possible loan losses related to these loans was $1,146,000.
Interest received on these loans during 1997 was $479,698.
Impaired loans had recorded investments of approximately
$5,136,000 at December 31, 1996.
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, 1997 and 1996, 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 1997 or 1996.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
<S> <C> <C> <C> <C>
1997
Aggregate of certain party loans $ 8,222,262 $ 12,488,090 $ 8,276,031 $ 12,434,321
1996
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 2,926,063 $ 2,678,386 $ 2,342,290
Provision charged to operating expenses 1,940,000 1,300,000 670,000
Loan losses:
Loans charged off (2,064,138) (1,388,422) (555,957)
Recoveries on loans previously
charged off 141,075 336,099 222,053
Balance at end of year $ 2,943,000 $ 2,926,063 $ 2,678,386
<FN>
<F6>
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, 1997.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 1,348,288 $ 1,348,288
Premises 7,027,521 7,013,942
Furniture and equipment 3,857,459 4,068,373
Leasehold improvements 1,209,113 1,149,732
13,442,381 13,580,335
Less allowance for depreciation and
amortization (7,029,016) (6,750,860)
$ 6,413,365 $ 6,829,475
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1997 and 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank
premises and equipment total $651,619 for 1997, $685,005 for
1996, and $645,816 for 1995. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling approximately $2,670,000 at
December 31, 1997.
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, 1997, additional dividends of approximately $15,900,000
could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for five of the Bank's office locations and
certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $689,887,
$726,337, and $660,121 for equipment leases, and $112,070,
$112,384, and $111,649 for building leases, in 1997, 1996, and
1995, respectively. Future minimum lease commitments as of
December 31, 1997, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<C> <C>
1998 $ 513,083
1999 121,128
2000 124,128
2001 124,128
2002 86,328
Thereafter 94,200
Total future minimum lease payments $ 1,062,995
<FN>
<F8>
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>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 2,416,401 $ 2,422,550 $ 2,166,566
State 557,218 628,788 585,606
Total current 2,973,619 3,051,338 2,752,172
Deferred:
Federal 215,949 (137,700) (198,393)
State 38,108 (24,299) (35,010)
Total deferred 254,057 (161,999) (233,403)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
<FN>
<F8>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for possible loan losses $ 776,888 $ 914,386 $ 815,315
Write-down of other real estate - 177,120 177,120
Deferred compensation 403,857 336,255 256,139
Deferred loan fees 19,823 26,863 44,051
Deferred tax asset 1,200,568 1,454,624 1,292,625
Unrealized gain on AFS securities (240,124) (97,294) (157,392)
Deferred tax liability (240,124) ( 97,294) (157,392)
Net deferred tax asset $ 960,444 $ 1,357,330 $ 1,135,233
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,495,754 $ 3,317,086 $ 2,935,722
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (896,112) (859,383) (783,011)
Nondeductible interest expense 106,329 101,534 89,491
Employee benefits (55,560) (34,685) (22,418)
Other nondeductible expenses
(nontaxable income) - net 11,146 13,515 (5,695)
State income taxes, net of
federal tax benefit 392,915 398,963 363,393
Dividend income exclusion (33,239) (34,855) (18,324)
Other 55,891 (12,836) (40,388)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
Effective tax rate 31.4% 29.6% 29.2%
<FN>
<F11>
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 1997, 1996, and 1995 amounted to
$2,927,000, $3,140,000 and $2,756,442, respectively.
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters of
credit in the normal course of business at December 31, 1997,
were $21,735,000 and $1,977,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1997,
1996, and 1995 amounted to $17,049,703, $17,206,708, and
$14,845,107, 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, 1997 and 1996,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios exceeded
the minimum standard for a "well capitalized" bank as of
September 30, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<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, 1997 Amount Ratio Amount Ratio > or= Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 61,732,093 19.68% 25,098,756 8.00% 31,373,445 10.00%
Bank 61,153,956 19.54% 25,040,651 8.00% 31,300,813 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789,093 18.74% 12,549,378 4.00% 18,824,067 6.00%
Bank 58,210,956 18.60% 12,520,325 4.00% 18,780,488 6.00%
Tier I Capital (Average)
(to Average Assets)
Consolidated 56,515,935 10.73% 21,073,801 4.00% 26,342,251 5.00%
Bank 55,946,149 10.63% 21,047,205 4.00% 26,309,006 5.00%
As of December 31, 1996
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% 11,988,374 4.00% 17,982,562 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% 20,102,944 4.00% 25,128,680 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
</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 nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<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 $684,227, $661,307 and $633,459, in 1997, 1996, and
1995, 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 (1997 - $645,985; 1996 - $620,657) purchased
in 1993 to fund the plan and the related liability (1997 -
$501,255; 1996 - $513,792) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $25,328 in 1997 and $26,436 in 1996 is
included in the above asset values. Net noncash income was
$14,133 in 1995. 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 $42,463 in
1997, $64,024 in 1996, and $106,066 in 1995.
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, net of benefits paid out in 1997
and accruals, of $173,841 for 1997, $172,871 for 1996, and
$176,727 for 1995 have been recognized in the accompanying
consolidated financial statements. In connection with this
plan, a single premium universal life insurance policy was
purchased on the life of each director who elected to
participate. Additional single premium universal life insurance
policies, totaling $385,000, were purchased in 1997 for new
participants. Net noncash income recognized on these policies
of $103,953 in 1997 and $85,249 in 1996 is included in the cash
surrender values of $2,376,124 and $1,887,171 reported in other
assets at December 31, 1997 and 1996, respectively. Net noncash
income was $51,803 in 1995.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1997 -
$819,460; 1996 - $785,330) is included in other assets, and net
noncash income recognized on this policy of $34,130 in 1997 and
net expense of $9,670 in 1996 is included in the above asset
values.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replacement/split dollar plan. These
policies have an aggregate face amount of $3,163,750.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,1997 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks $ 29,873 $ 29,873 $ 27,917 $ 27,917
Federal funds sold 12,800 12,800 - -
Securities held to maturity 96,266 98,371 118,542 119,226
Securities available for
sale 48,921 49,521 55,898 56,142
Loans, net 328,417 325,323 300,806 309,401
Accrued interest receivable 5,366 5,366 5,549 5,549
Financial liabilities
Deposits 470,282 456,557 460,573 449,129
Federal funds purchased - - 5,000 5,000
Short term borrowings 602 602 523 523
Accrued interest payable 2,794 2,794 2,539 2,539
<FN>
<F13>
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, 1997, 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
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362,178 $ 9,705,584 $ 9,774,855 $ 9,804,468 $ 38,647,085
Interest expense 4,258,739 4,330,171 4,361,715 4,353,765 17,304,390
Net interest income 5,103,439 5,375,413 5,413,140 5,450,703 21,342,695
Provision for possible loan
losses 450,000 290,000 550,000 650,000 1,940,000
Noninterest expenses, net
of noninterest income 2,394,981 2,405,847 2,388,160 1,932,079 9,121,067
Income before income taxes 2,258,458 2,679,566 2,474,980 2,868,624 10,281,628
Income taxes 556,134 795,731 917,613 958,198 3,227,676
Net income $ 1,702,324 $ 1,883,835 $ 1,557,367 $ 1,910,426 $ 7,053,952
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.35 $ 1.11 $ 1.36 $ 5.04
First Secon Third Fourth
Quarter Quarter Quarter Quarter Total
1996
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
<FN>
<F14>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its sixteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
<S> <C> <S><C> <S><C> <S><C>
Demand deposits $ 62,909 - % $ 61,509 - % $ 56,730 - %
NOW and money market accounts 166,914 3.37 158,450 3.37 149,016 3.51
Savings deposits 43,775 3.37 37,421 3.22 34,629 3.00
Time deposits of less than
$100,000 152,389 5.29 151,952 5.40 136,568 5.30
Time deposits of $100,000 or
more 37,686 5.42 34,539 5.41 32,524 5.35
Total In Domestic Offices $463,673 3.71% $443,870 3.74% $409,467 3.72%
<FN>
<F15>
Table XV - Average Amounts of Deposits and Average Rates Paid
by Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 9,308 $ 11,680 $ 7,877
3 to 12 months 25,981 22,638 18,407
Over 12 months 4,039 4,812 4,310
$ 39,328 $ 39,130 $ 30,594
<FN>
<F16>
Table XVI - Maturities of Time Deposits of $100,000 or More at
December 31
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 72 $ 142
Investment in bank subsidiary - at equity 59,565 53,870
Investment in credit life insurance company
- at cost 50 50
Investment in other securities 25 22
Dividends receivable from bank subsidiary 784 714
Cash surrender value - life insurance 651 489
Other assets - 1
Total assets $ 61,147 $ 55,288
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 220 $ 173
Dividends payable 784 714
Total liabilities 1,004 887
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 45,783 40,255
Net unrealized gain (loss) on
available-for-sale securities, net of
tax 360 146
Total stockholders' equity 60,143 54,401
Total liabilities and stockholders' equity $ 61,147 $ 55,288
<FN>
<F17>
Table XVII - Condensed Statements of Balance Sheet of Parent
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Dividends from bank subsidiary $ 1,526 $ 1,372
Other dividend income 80 85
Interest income 8 6
Other 34 28
Operating expenses 76 68
Income before equity in undistributed net
income of bank subsidiary 1,572 1,423
Equity in undistributed net income of bank
subsidiary 5,482 5,444
Net Income $ 7,054 $ 6,867
<FN>
<F18>
Table XVIII - Condensed Statements of Income 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>
Condensed Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Operating activities
Net income for the year $ 7,054 $ 6,867
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed net income
of bank subsidiary (5,482) (5,444)
Increase in other assets (98) (111)
Increase in payables 47 44
Total adjustments (5,533) (5,511)
Net cash provided by operating
activities 1,521 1,356
Net cash provided by (used in)
investing activities
Purchases of investment securities (119) (133)
Proceeds from maturities of
investment securities 119 137
Purchase of single premium life
insurance policy (135) -
Net cash provided by (used in)
investing activities (135) 4
Net cash used in financing activities
Cash dividends paid (1,456) (1,288)
Increase (decrease) in cash (70) 72
Cash at beginning of year 142 70
Cash at end of year $ 72 $ 142
<FN>
<F19>
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 1997, 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. "High Technology + High Commitment =
High Performance" was the challenge for the year as the Bank
committed to provide quality services in diverse markets and a
dynamic interest rate environment. Our customers are enjoying
the quality service of a community bank and the safety and
strength of a regional bank.
The accompanying tables plus the discussion and financial
information are presented to aid in understanding First Farmers
and Merchants Corporation's current financial position and
results of operations. The emphasis of this discussion will be
on the years 1997, 1996, and 1995; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition
depends on the quality and nature of its assets, its liability
and capital structure, the market and economic conditions, and
the quality of its personnel. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
Summary
The Bank reported net income of $7.1 million for 1997 compared
to $6.9 million in 1996 and $6.1 million in 1995. On a per
common share basis, net income was $5.04 for 1997 versus $4.90
for 1996 and $4.37 for 1995. The improvement in 1997's earnings
resulted from a strong gross margin reinforced by loan demand
that changed the mix of earning assets as higher yielding loans
were funded with maturing investment securities and an increase in
noninterest income sufficient to cover a smaller increase in
noninterest expenses and most of the increase in taxes. These
improvements were partially offset by higher additions to the allowance
for loan losses.
The return on average equity for 1997 was 12.2% compared to
13.2% for 1996 and 13.1% for 1995. The return on average
assets was 1.34% for 1997 versus 1.37% for 1996 and 1.32% for
1995.
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>
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
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 $ 314,198 9.18 % $ 28,858 * $ 290,413 9.43 % $ 27,373 * $ 276,166 9.38 % $ 25,892 *
Bank time deposits 1 - - 1 - - 2 - -
Taxable securities 113,013 6.35 7,173 118,114 6.14 7,256 104,217 6.20 6,457
Tax exempt securities 47,366 6.96 3,297 * 44,158 7.10 3,134 * 39,105 8.07 3,156 *
Federal funds sold 4,631 5.46 253 4,198 5.31 223 2,076 5.83 121
TOTAL EARNING ASSETS 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986 421,566 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 27,039 25,760 24,829
Bank premises and equipment 6,633 6,708 6,246
Other assets 15,045 13,348 11,098
TOTAL ASSETS $ 527,926 $ 502,700 $ 463,739
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 166,828 3.38 % $ 5,634 $ 158,438 3.39 % $ 5,338 $ 148,993 3.51 % $ 5,223
Savings 43,776 3.37 1,476 37,428 3.22 1,204 34,627 3.00 1,040
Time 152,389 5.29 8,063 151,973 5.40 8,210 136,605 5.30 7,245
Time over $100,000 37,680 5.43 2,045 34,554 5.40 1,866 32,522 5.35 1,740
TOTAL INTEREST BEARING
DEPOSITS 400,673 4.30 17,218 382,393 4.35 16,618 352,747 4.32 15,248
Federal funds purchased 1,016 5.80 59 1,043 5.56 58 2,415 5.92 143
Other short-term debt 538 5.02 27 622 5.79 36 565 5.49 31
TOTAL INTEREST BEARING
LIABILITIES 402,227 4.30 $17,304 384,058 4.35 $16,712 355,727 4.34 $15,422
Noninterest bearing liabilities
Demand deposits 62,903 61,509 56,742
Other liabilities 4,990 5,066 4,515
TOTAL LIABILITIES 470,120 450,633 416,984
Stockholders' equity 57,806 52,067 46,755
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 527,926 $ 502,700 $ 463,739
Spread between combined
rates earned and combined
rates paid* 3.96 % 3.96 % 4.12 %
Net yield on interest-earning
assets* 4.65 % 4.66 % 4.79 %
<FN>
<F1>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
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 amortized cost of
available-for-sale securities were used in the calculations in
this table.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<CAPTION>
1997 Compared 1996 1996 Compared 1995
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S>
Revenue earned on <C> <C> <C> <C> <C> <C>
Net loans $ 2,243 $ (758) $ 1,485 $ 1,336 $ 145 $ 1,481
Investment securities
Taxable securities (314) 231 (83) 861 (62) 799
Tax-free securities 228 (65) 163 408 (430) (22)
Federal funds sold 23 7 30 124 (22) 102
Total interest earning
assets 2,180 (585) 1,595 2,729 (369) 2,360
Interest paid on
NOW and money market
accounts 283 13 296 331 (216) 115
Savings deposits 204 68 272 84 80 164
Time deposits 23 (170) (147) 815 150 965
Time over $100,000 169 10 179 109 17 126
Federal funds purchased (2) 3 1 (81) (4) (85)
Short term debt (5) (4) (9) 3 2 5
Total interest-bearing
funds 672 (80) 592 1,261 29 1,290
Net interest earnings 1,508 $ (505) $ 1,003 $ 1,468 $ (398) $ 1,070
</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, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
investment securities. Bank qualified 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 stockholders. The first graph illustrates in thousands of
dollars, the categories of average earning assets and the
portion each category is of the total for the last three years.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Investment
Loans Securities Other
<S> <C> <C> <C>
1997 $314,198 $160,722 $4,613
1996 290,413 162,188 4,199
1995 276,166 143,358 2,078
</TABLE>
Average earning assets increased 5.0% in 1997 compared to an
8.4% increase in 1996 and a 3.0% increase in 1995. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1997, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 8.2% growth
from 1996 to 1997, a 5.2% growth from 1995 to 1996, and an 11.5%
growth from 1994 to 1995. Average investments accounted for the
remaining balance of average earning assets at December 31,
1997, decreasing .9% from year end 1996. Some of the proceeds
from maturities and calls of investment securities was used to
fund the expanding loan demand during the year. Average
investments increased 14.5% in 1996. The Bank purchased certain
assets and assumed certain deposit liabilities of two branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. Most of the increase in investments during 1996 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. Average total assets increased during
the last three years as evidenced by a 5.0% growth from 1996 to
1997, an 8.4% growth from 1995 to 1996, and a 2.6% growth from
1994 to 1995.
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 Noninterest_Bearing
Deposits Deposits Other
<S> <C> <C> <C>
1997 $390,077 $80,205 $ -
1996 382,393 61,509 1,043
1995 352,747 56,742 3,526
</TABLE>
The bank's average deposits grew during the last three years
reflecting a 4.4% growth from 1996 to 1997, an 8.4% growth from
1995 to 1996, and a 1.3% growth from 1994 to 1995. Short and
medium term rates remained competitive compared to longer term
rates during 1997 and some depositors left money in or moved
money back into interest-bearing transaction accounts, which
increased 5.3% during 1997 and 6.3% in 1996. However, over half
of the increase during 1996 was attributable to the acquisition.
Average interest-bearing checking accounts decreased 7.6 % in
1995 as investors took advantage of higher certificate of
deposit rates. Average savings deposits increased almost 17.0%
during 1997 and 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. Average certificates of deposit under
$100,000 increased .3% during 1997, 11.3% during 1996, 60.0%
from the acquisition, and 8.0% in 1995. Certificates of deposit
over $100,000 increased 9.1% in 1997 compared to 6.3% in 1996,
87.8% from the acquisition, and 24.8% in 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1997, 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, 1997, 1996, and 1995 was 4.65%, 4.66%, and 4.79% respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1997 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 12,800 $ - $ - $ - $ 12,800
Taxable investment
securities 3,928 7,989 5,000 80,574 97,491
Tax-exempt investment
securities 1,151 720 1,150 45,275 48,296
Loans and leases, net of
unearned 61,297 45,612 65,193 159,606 331,708
Total earning assets 79,176 54,321 71,343 285,455 490,295
Interest-bearing
liabilities
NOW and money market
accounts 48,546 - 66,832 40,656 156,034
Savings - - 44,170 - 44,170
Time 42,702 30,421 54,807 22,614 150,544
Time over $100,000 10,242 8,917 16,536 3,634 39,329
Other short-term debt 602 - - - 602
Total interest
bearing liabilities 102,092 39,338 182,345 66,904 $ 390,679
Noninterest-bearing, net (99,616)
Net asset/liability
funding gap (22,916) 14,983 (111,002) 118,935
Cumulative net asset/
liability funding gap $ (22,916) $ (7,933) $ (118,935) $ -
<FN>
<F2>
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 & 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, 1997.
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 $3.0 million at December
31, 1997, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent .9% of gross loans.
Commercial loans comprised $.6 million of the total, with loans
secured by real estate accounting for $1.4 million, and
installment loans $1.0 million. The gross interest income that
would have been recorded during 1997 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 $431, $374, and $365 thousand for
the years ended December 31, 1997, 1996, and 1995 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.
The bar graph on the bottom of this page shows the increase in
average net loans (in thousands of dollars) and the line shows
the ratio of net loan charge offs to average loans. The ratio
at December 31, 1997 was .61%. Management monitoring found and
corrected a problem in consumer loan underwriting that
contributed to the higher net charge off percentage in 1997.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1981 $ 54,908 .0027
1982 60,119 .0077
1983 66,964 .0039
1984 80,055 .0036
1985 98,353 .0044
1986 120,243 .0036
1987 142,959 .0077
1988 154,506 .0027
1989 163,003 .0032
1990 172,749 .0030
1991 182,561 .0037
1992 215,158 .0023
1993 233,608 .0030
1994 247,791 .0014
1995 276,166 .0012
1996 290,413 .0036
1997 314,198 .0061
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,608
Balance of allowance for
possible loan losses at
beginning of year $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Loans charged-off:
Loans secured by real
estate 88 368 15 135 396
Commercial and industrial
loans 605 141 170 42 222
Individuals 1,371 879 371 246 230
TOTAL LOANS CHARGED
OFF 2,064 1,388 556 423 848
Recoveries of loans
previously charged off:
Loans secured by real
estate 8 111 97 9 56
Commercial and industrial
loans 53 42 14 36 52
Individuals 80 183 111 36 40
TOTAL RECOVERIES 141 336 222 81 148
NET LOANS
CHARGED-O 1,923 1,052 334 342 700
Provision charged to
operating expenses 1,940 1,300 670 660 470
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Ratio of net charge-offs
during the period to average
loans outstanding 0.61% 0.36% 0.12% 0.14% 0.30%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1997, the Corporation had a ratio of
average tier 1 capital to average assets of 10.73%. This
compares to a ratio of average tier 1 capital to average assets
of 10.36% at December 31, 1996, and 10.08% at December 31, 1995.
Cash dividends declared in 1997 were 11.2% more than those paid
in 1996. The dividend to net income ratio was 22%. Additional
dividends of approximately $15.9 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, 1997, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 18.7% and 19.7% respectively. At
December 31, 1996, the comparable ratios were 17.7% and 18.7%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital.
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>
1991 $30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS COPROATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 4.2% in 1997 enhanced by loan
growth in all the market areas the Bank serves. Interest and
fees earned on loans increased 5.5% in 1997 accounting for 74.6%
of gross interest income. Interest earned on investment
securities and other investments increased .7% in 1997 rounding
out gross interest income contributing 25.4%. Total interest
income increased 7.5% in 1996 and 11.9% in 1995.
Interest Expense
Total interest expense increased 3.6% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares
favorably to a 8.4% increase in 1996, about half of which can be
attributed to the acquisition, and a 19.9% increase in 1995.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. This
contributed to the strong gross margin achieved during 1997.
The net interest margin (tax equivalent net interest income
divided by average earning assets) was 4.7% at the end of 1997
and 1996 and 4.8% at the end of 1995.
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 19.6% during 1997 led by fees on
deposits. 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. This compares to a 28.4% increase
in 1996 and a 14.9% increase in 1995.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1997 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 $1,471 21.2%
Other service fees 845 12.2%
Securities gains 488 7.0%
Fees on deposits 3,744 53.9%
Other 394 5.7%
</TABLE>
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1997 which compares favorably with the
5.8% increase in 1996. The increase in 1995 was 6.2%.
Increased productivity fostered by our technology improvements
as the learning curve diminished and cost control efforts
contributed to this cost containment. Included in this category
is net occupancy expense for an additional office opened in 1997
and furniture and equipment, which includes technology expenses,
that was down over 5% from 1996.
A pie chart is included at this point in the materials sent to
out stockholders illustrating the composition of noninterest
expense in 1997 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 $7,319 45.6%
Furniture and equipment 1,501 9.3%
Occupancy 1,317 8.2%
Other 5,927 36.9%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,841,420 $ 27,343,817 $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment
securities
Taxable interest 6,802,934 6,892,118 6,179,492 7,012,626 6,925,404
Exempt from federal
income tax 2,488,475 2,366,764 2,156,813 2,184,666 1,857,168
Dividends 260,759 256,951 177,790 204,948 72,054
9,552,168 9,515,833 8,514,095 9,402,240 8,854,626
Other interest
income 253,497 223,019 121,492 284,384 347,287
TOTAL INTEREST
INCOME 38,647,085 37,082,669 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 17,218,537 16,617,525 15,247,875 12,770,618 11,998,235
Interest on other short
term borrowings 85,853 94,232 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 17,304,390 16,711,757 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 21,342,695 20,370,912 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES 1,940,000 1,300,000 670,000 660,000 470,000
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 19,402,695 19,070,912 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,470,568 1,323,525 1,251,642 1,249,359 863,952
Service fees on deposit
accounts 3,744,381 3,373,805 2,697,332 2,317,992 2,206,026
Other service fees,
commissions, and fees 845,072 745,523 300,407 336,758 509,009
Other operating income 394,322 363,430 322,634 319,466 315,108
Securities gains (losses) 487,972 - 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 6,942,315 5,806,283 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee
benefits 7,319,460 7,030,588 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,316,588 1,211,067 1,279,434 1,190,678 1,070,971
Furniture and equipment
expense 1,500,486 1,580,753 1,382,769 1,069,856 889,848
Deposit insurance 57,004 6,549 499,709 890,646 826,966
Other operating expenses 5,869,844 5,292,103 4,557,307 4,109,461 4,180,105
TOTAL NONINTEREST
EXPENSES 16,063,382 15,121,060 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,281,628 9,756,135 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES 3,227,676 2,889,339 2,518,769 2,203,746 2,220,965
NET INCOME $ 7,053,952 $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE
(1,400,000 outstanding
shares) $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
</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 2.7% higher in 1997 than in 1996. As indicated
earlier, the improvement in 1997's earnings resulted from a
strong gross margin reinforced by loans increasing as a
percentage of earning assets, an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses,
and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan
losses associated with a corrected loan underwriting problem.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have been adopted by the Corporation as follows:
(1) Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" requires a reconciliation of the
numerators and the denominators of the basic and diluted
per-share computation for income from continuing operations.
The statement is effective prospectively for earnings per share
computation for both interim and annual periods ending after
December 31, 1997. Because the Corporation has no potential
common stock outstanding, it is required to present only basic
earnings per share and its presentation of earnings per share
did not change. (2) Statement of Financial Accounting Standards
No. 129 (SFAS 129), "Disclosure of Information about Capital Structure"
requires an entity to explain, in summary form within its
financial statements, the pertinent rights and privileges of the
various securities outstanding. The Corporation only has one
class of common stock outstanding and this statement had no
material effect on the financial statements.
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Corporation as
follows: (1) Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income" purposes that
an entity report a measure of all changes in equity that result
from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as
owners. The statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe this
statement will have any material effect on future financial
statements except for disclosures. (2) Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information" establishes
guidelines for reporting financial information about an
operating segment or component of an enterprise. The statement
is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any
material effect on future financial statements except for
disclosures.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force has been established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, or are in the process of
being obtained, from our software and hardware vendors,
confirming their Year 2000 compatibility; and plans are in place
for testing our systems' compatibility before June 30, 1998.
Management believes that our information systems are well on
their way to being Year 2000 compliant.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1997, had a
market value of $109 million and were held by 1,618 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 tables below show 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.
These tables were shown graphically in the materials sent to our
stockholders.
<TABLE>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <C> <C> <C> <C>
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
First quarter $ 67.00 $ 65.00 $
Second quarter 69.00 69.00 0.53
1997 Third quarter 72.00 70.00
Fourth quarter 78.00 72.00 0.56
$ 1.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE DATA
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 527,926 $ 502,700 $ 463,739 $ 451,953 $ 420,760
AVERAGE LOANS (NET) $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,609
AVERAGE DEPOSITS $ 463,576 $ 443,902 $ 409,489 $ 404,412 $ 378,782
RETURN ON EQUITY AND
ASSETS
Return on average
assets 1.34% 1.37% 1.32% 1.23% 1.25%
Return on beginning
equity 12.97% 14.01% 13.95% 14.11% 14.93%
Average tier 1
capital to average
assets 10.73% 10.36% 10.08% 9.25% 8.90%
COMMON DIVIDEND PAYOUT
RATIO
Earnings per shar $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
Cash dividends per
share $ 1.09 $ 0.98 $ 0.88 $ 0.80 $ 0.73
Ratio 22% 20% 20% 20% 19%
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 39,581 $ 37,986 $ 35,626 $ 32,039 $ 29,465
INTEREST EXPENSE 17,304 16,712 15,422 12,864 12,037
$ 22,277 $ 21,274 $ 20,204 $ 19,175 $ 17,428
NET INTEREST MARGIN* 4.65% 4.66% 4.79% 4.68% 4.58%
<FN>
<F3>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
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 (200) full time employees and eighty
(80) part time employees. Five of the Bank's officers also were
officers of FFMC. Employee benefit programs provided by the
Bank include a deferred profit sharing plan, an annual profit
sharing plan, a salary continuation plan, a deferred
compensation plan, training programs, group life and health
insurance and paid vacations.
Item 2. Properties.
A discussion of the properties owned by the company is
incorporated herein by reference to Notes to Consolidated
Financial Statements which are a part of the Annual Report to
Stockholders which is included in this filing. Other real
estate owned by the Bank as of December 31, 1997, included: (1)
a one-tenth interest in approximately one hundred acres known as
Town Center, located in the southern part of the town of Spring
Hill, in northern Maury County, Tennessee on US 31 Highway and
(2) a house and two acres on County Farm Road five miles north
of Centerville, Tennessee. The properties are not depreciated.
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, 1997, 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 fifteen (15) 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 and Crockett 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. At December 31, 1997, approximately $8.9
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
Securities
Investments are classified in three categories and accounted
for as follows:
Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Debt and equity securities that are bought and held
principally for the purpose of selling them in
<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)
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 deferred
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 payoff generally are
stated at their outstanding unpaid principal balances net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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.
When a loan is collateral dependent, impairment is measured
based on the observable market price or the fair value of the
collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Interest on loans is accrued 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 nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment. Interest income on loans in
nonaccrual status is recognized only to the extent of the excess
of cash payments received over principal payments due.
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 $410 thousand at December 31, 1997, and $450
thousand at December 31, 1996.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through
provisions for loan losses charged against income. Loan quality
is monitored by Loan Review and
<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)
the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and
subsequent recoveries, if any, are credited to the allowance
account in the period such determination is made. The adequacy
of the allowance for possible loan losses is evaluated quarterly
in conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1997 - $182,613; 1996 - $224,212; and 1995 - $168,020.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share". which supersedes APB Opinion No.
15. This statement requires the presentation of earnings per
share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Because the
Corporation has no potential common stock outstanding, it is
required to present only basic earnings per share and its
presentation of earnings per share will not change. Earnings
per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each
period presented.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $116,315,234 and
$103,540,673 at December 31, 1997 and 1996, respectively (fair
value: 1997 - $117,969,544; 1996 - $104,061,311), 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, 1997, 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
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337,240 $ 233,853 $ 14,893 $ 22,556,200
U.S. Government agencies 23,834,686 53,172 92,413 23,795,445
Other securities 2,749,094 422,591 2,000 3,169,685
$ 48,921,020 $ 709,616 $ 109,306 $ 49,521,330
Held-to-maturity securities
U.S. Treasury $ 10,432,892 $ 209,508 $ - $ 10,642,400
U.S. Government agencies 36,552,480 657,930 2,048 37,208,362
States and political
subdivisions 48,465,174 1,218,108 12,144 49,671,138
Other securities 815,421 33,735 - 849,156
$ 96,265,967 $ 2,119,281 $ 14,192 $ 98,371,056
December 31, 1996
Available-for-sale securities
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
<FN>
<F1>
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, 1997, 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, 1997, 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 $11,008,435, $3,020,054, and
$7,306,453 during 1997, 1996, and 1995, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$32,386,811, $56,112,000, and $18,848,992 during 1997, 1996, and
1995, respectively. Gross gains of $489,697 and gross losses of
$1,725 were realized on dispositions in 1997. There were no
realized gains or losses in 1996. Gross gains of $1,182 and
gross losses of $-0- were realized on the dispositions in 1995.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 8,051,787 $ 8,049,800 5.5%
After one but within five years 14,285,453 14,506,400 6.2%
U.S. Government agencies
Within one year 3,994,953 3,999,700 6.1%
After one but within five years 19,585,333 19,541,020 5.8%
After ten years 254,400 254,725 6.1%
Other securities 2,749,094 3,169,685 9.0%
$ 48,921,020 $ 49,521,330
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,432,892 $ 10,642,400 6.4%
U.S. Government agencies
Within one year 2,999,150 2,997,100 5.4%
After one but within five years 18,669,684 19,008,962 6.6%
After five but within ten years 14,883,646 15,202,300 6.5%
States and political subdivisions
Within one year 3,239,829 3,286,218 9.3%
After one but within five years 13,595,854 13,865,175 7.7%
After five but within ten years 18,510,918 18,983,557 7.4%
After ten years 13,118,573 13,536,188 7.8%
Other securities
After one but within five years 315,421 323,206 8.0%
After five but within ten years 500,000 525,950 7.3%
$ 96,265,967 $ 98,371,056
<FN>
<F2>
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>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 60,592,529 $ 54,565,335
Tax exempt municipal loans 768,125 605,933
Real estate
Construction 5,861,866 8,751,021
Commercial mortgages 52,968,199 46,114,930
Residential mortgages 146,768,418 125,854,753
Other 5,869,654 7,115,749
Consumer loans 58,879,231 60,993,583
331,708,022 304,001,304
Less:
Net unamortized loan origination fees (347,839) (269,260)
Allowance for possible loan losses (2,943,000) (2,926,063)
$ 328,417,183 $ 300,805,981
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1997
and 1996
</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 $ 78,350 $ 47,052 $ 40,499 $ 165,901
Variable rate loans 93,752 30,484 41,571 165,807
$ 172,102 $ 77,536 $ 82,070 $ 331,708
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1997
</FN>
</TABLE>
Loans having recorded investments of $2,954,000 at December
31, 1997, have been identified as impaired. The total allowance
for possible loan losses related to these loans was $1,146,000.
Interest received on these loans during 1997 was $479,698.
Impaired loans had recorded investments of approximately
$5,136,000 at December 31, 1996.
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, 1997 and 1996, 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 1997 or 1996.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
<S> <C> <C> <C> <C>
1997
Aggregate of certain party loans $ 8,222,262 $ 12,488,090 $ 8,276,031 $ 12,434,321
1996
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 2,926,063 $ 2,678,386 $ 2,342,290
Provision charged to operating expenses 1,940,000 1,300,000 670,000
Loan losses:
Loans charged off (2,064,138) (1,388,422) (555,957)
Recoveries on loans previously
charged off 141,075 336,099 222,053
Balance at end of year $ 2,943,000 $ 2,926,063 $ 2,678,386
<FN>
<F6>
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, 1997.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 1,348,288 $ 1,348,288
Premises 7,027,521 7,013,942
Furniture and equipment 3,857,459 4,068,373
Leasehold improvements 1,209,113 1,149,732
13,442,381 13,580,335
Less allowance for depreciation and
amortization (7,029,016) (6,750,860)
$ 6,413,365 $ 6,829,475
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1997 and 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank
premises and equipment total $651,619 for 1997, $685,005 for
1996, and $645,816 for 1995. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling approximately $2,670,000 at
December 31, 1997.
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, 1997, additional dividends of approximately $15,900,000
could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for five of the Bank's office locations and
certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $689,887,
$726,337, and $660,121 for equipment leases, and $112,070,
$112,384, and $111,649 for building leases, in 1997, 1996, and
1995, respectively. Future minimum lease commitments as of
December 31, 1997, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<C> <C>
1998 $ 513,083
1999 121,128
2000 124,128
2001 124,128
2002 86,328
Thereafter 94,200
Total future minimum lease payments $ 1,062,995
<FN>
<F8>
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>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 2,416,401 $ 2,422,550 $ 2,166,566
State 557,218 628,788 585,606
Total current 2,973,619 3,051,338 2,752,172
Deferred:
Federal 215,949 (137,700) (198,393)
State 38,108 (24,299) (35,010)
Total deferred 254,057 (161,999) (233,403)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
<FN>
<F8>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for possible loan losses $ 776,888 $ 914,386 $ 815,315
Write-down of other real estate - 177,120 177,120
Deferred compensation 403,857 336,255 256,139
Deferred loan fees 19,823 26,863 44,051
Deferred tax asset 1,200,568 1,454,624 1,292,625
Unrealized gain on AFS securities (240,124) (97,294) (157,392)
Deferred tax liability (240,124) ( 97,294) (157,392)
Net deferred tax asset $ 960,444 $ 1,357,330 $ 1,135,233
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,495,754 $ 3,317,086 $ 2,935,722
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (896,112) (859,383) (783,011)
Nondeductible interest expense 106,329 101,534 89,491
Employee benefits (55,560) (34,685) (22,418)
Other nondeductible expenses
(nontaxable income) - net 11,146 13,515 (5,695)
State income taxes, net of
federal tax benefit 392,915 398,963 363,393
Dividend income exclusion (33,239) (34,855) (18,324)
Other 55,891 (12,836) (40,388)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
Effective tax rate 31.4% 29.6% 29.2%
<FN>
<F11>
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 1997, 1996, and 1995 amounted to
$2,927,000, $3,140,000 and $2,756,442, respectively.
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters of
credit in the normal course of business at December 31, 1997,
were $21,735,000 and $1,977,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1997,
1996, and 1995 amounted to $17,049,703, $17,206,708, and
$14,845,107, 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, 1997 and 1996,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios exceeded
the minimum standard for a "well capitalized" bank as of
September 30, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<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, 1997 Amount Ratio Amount Ratio > or= Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 61,732,093 19.68% 25,098,756 8.00% 31,373,445 10.00%
Bank 61,153,956 19.54% 25,040,651 8.00% 31,300,813 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789,093 18.74% 12,549,378 4.00% 18,824,067 6.00%
Bank 58,210,956 18.60% 12,520,325 4.00% 18,780,488 6.00%
Tier I Capital (Average)
(to Average Assets)
Consolidated 56,515,935 10.73% 21,073,801 4.00% 26,342,251 5.00%
Bank 55,946,149 10.63% 21,047,205 4.00% 26,309,006 5.00%
As of December 31, 1996
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% 11,988,374 4.00% 17,982,562 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% 20,102,944 4.00% 25,128,680 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
</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 nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<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 $684,227, $661,307 and $633,459, in 1997, 1996, and
1995, 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 (1997 - $645,985; 1996 - $620,657) purchased
in 1993 to fund the plan and the related liability (1997 -
$501,255; 1996 - $513,792) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $25,328 in 1997 and $26,436 in 1996 is
included in the above asset values. Net noncash income was
$14,133 in 1995. 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 $42,463 in
1997, $64,024 in 1996, and $106,066 in 1995.
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, net of benefits paid out in 1997
and accruals, of $173,841 for 1997, $172,871 for 1996, and
$176,727 for 1995 have been recognized in the accompanying
consolidated financial statements. In connection with this
plan, a single premium universal life insurance policy was
purchased on the life of each director who elected to
participate. Additional single premium universal life insurance
policies, totaling $385,000, were purchased in 1997 for new
participants. Net noncash income recognized on these policies
of $103,953 in 1997 and $85,249 in 1996 is included in the cash
surrender values of $2,376,124 and $1,887,171 reported in other
assets at December 31, 1997 and 1996, respectively. Net noncash
income was $51,803 in 1995.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1997 -
$819,460; 1996 - $785,330) is included in other assets, and net
noncash income recognized on this policy of $34,130 in 1997 and
net expense of $9,670 in 1996 is included in the above asset
values.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replacement/split dollar plan. These
policies have an aggregate face amount of $3,163,750.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,1997 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks $ 29,873 $ 29,873 $ 27,917 $ 27,917
Federal funds sold 12,800 12,800 - -
Securities held to maturity 96,266 98,371 118,542 119,226
Securities available for
sale 48,921 49,521 55,898 56,142
Loans, net 328,417 325,323 300,806 309,401
Accrued interest receivable 5,366 5,366 5,549 5,549
Financial liabilities
Deposits 470,282 456,557 460,573 449,129
Federal funds purchased - - 5,000 5,000
Short term borrowings 602 602 523 523
Accrued interest payable 2,794 2,794 2,539 2,539
<FN>
<F13>
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, 1997, 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
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362,178 $ 9,705,584 $ 9,774,855 $ 9,804,468 $ 38,647,085
Interest expense 4,258,739 4,330,171 4,361,715 4,353,765 17,304,390
Net interest income 5,103,439 5,375,413 5,413,140 5,450,703 21,342,695
Provision for possible loan
losses 450,000 290,000 550,000 650,000 1,940,000
Noninterest expenses, net
of noninterest income 2,394,981 2,405,847 2,388,160 1,932,079 9,121,067
Income before income taxes 2,258,458 2,679,566 2,474,980 2,868,624 10,281,628
Income taxes 556,134 795,731 917,613 958,198 3,227,676
Net income $ 1,702,324 $ 1,883,835 $ 1,557,367 $ 1,910,426 $ 7,053,952
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.35 $ 1.11 $ 1.36 $ 5.04
First Secon Third Fourth
Quarter Quarter Quarter Quarter Total
1996
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
<FN>
<F14>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its sixteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
<S> <C> <S><C> <S><C> <S><C>
Demand deposits $ 62,909 - % $ 61,509 - % $ 56,730 - %
NOW and money market accounts 166,914 3.37 158,450 3.37 149,016 3.51
Savings deposits 43,775 3.37 37,421 3.22 34,629 3.00
Time deposits of less than
$100,000 152,389 5.29 151,952 5.40 136,568 5.30
Time deposits of $100,000 or
more 37,686 5.42 34,539 5.41 32,524 5.35
Total In Domestic Offices $463,673 3.71% $443,870 3.74% $409,467 3.72%
<FN>
<F15>
Table XV - Average Amounts of Deposits and Average Rates Paid
by Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 9,308 $ 11,680 $ 7,877
3 to 12 months 25,981 22,638 18,407
Over 12 months 4,039 4,812 4,310
$ 39,328 $ 39,130 $ 30,594
<FN>
<F16>
Table XVI - Maturities of Time Deposits of $100,000 or More at
December 31
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 72 $ 142
Investment in bank subsidiary - at equity 59,565 53,870
Investment in credit life insurance company
- at cost 50 50
Investment in other securities 25 22
Dividends receivable from bank subsidiary 784 714
Cash surrender value - life insurance 651 489
Other assets - 1
Total assets $ 61,147 $ 55,288
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 220 $ 173
Dividends payable 784 714
Total liabilities 1,004 887
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 45,783 40,255
Net unrealized gain (loss) on
available-for-sale securities, net of
tax 360 146
Total stockholders' equity 60,143 54,401
Total liabilities and stockholders' equity $ 61,147 $ 55,288
<FN>
<F17>
Table XVII - Condensed Statements of Balance Sheet of Parent
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Dividends from bank subsidiary $ 1,526 $ 1,372
Other dividend income 80 85
Interest income 8 6
Other 34 28
Operating expenses 76 68
Income before equity in undistributed net
income of bank subsidiary 1,572 1,423
Equity in undistributed net income of bank
subsidiary 5,482 5,444
Net Income $ 7,054 $ 6,867
<FN>
<F18>
Table XVIII - Condensed Statements of Income 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>
Condensed Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Operating activities
Net income for the year $ 7,054 $ 6,867
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed net income
of bank subsidiary (5,482) (5,444)
Increase in other assets (98) (111)
Increase in payables 47 44
Total adjustments (5,533) (5,511)
Net cash provided by operating
activities 1,521 1,356
Net cash provided by (used in)
investing activities
Purchases of investment securities (119) (133)
Proceeds from maturities of
investment securities 119 137
Purchase of single premium life
insurance policy (135) -
Net cash provided by (used in)
investing activities (135) 4
Net cash used in financing activities
Cash dividends paid (1,456) (1,288)
Increase (decrease) in cash (70) 72
Cash at beginning of year 142 70
Cash at end of year $ 72 $ 142
<FN>
<F19>
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, 1997.
<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 a part of the Annual Report to Stockholders
which is included in this filing.
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, 1997, 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 fifteen (15) 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 and Crockett 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. At December 31, 1997, approximately $8.9
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
Securities
Investments are classified in three categories and accounted
for as follows:
Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Debt and equity securities that are bought and held
principally for the purpose of selling them in
<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)
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 deferred
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 payoff generally are
stated at their outstanding unpaid principal balances net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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.
When a loan is collateral dependent, impairment is measured
based on the observable market price or the fair value of the
collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Interest on loans is accrued 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 nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment. Interest income on loans in
nonaccrual status is recognized only to the extent of the excess
of cash payments received over principal payments due.
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 $410 thousand at December 31, 1997, and $450
thousand at December 31, 1996.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through
provisions for loan losses charged against income. Loan quality
is monitored by Loan Review and
<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)
the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and
subsequent recoveries, if any, are credited to the allowance
account in the period such determination is made. The adequacy
of the allowance for possible loan losses is evaluated quarterly
in conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1997 - $182,613; 1996 - $224,212; and 1995 - $168,020.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share". which supersedes APB Opinion No.
15. This statement requires the presentation of earnings per
share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Because the
Corporation has no potential common stock outstanding, it is
required to present only basic earnings per share and its
presentation of earnings per share will not change. Earnings
per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each
period presented.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $116,315,234 and
$103,540,673 at December 31, 1997 and 1996, respectively (fair
value: 1997 - $117,969,544; 1996 - $104,061,311), 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, 1997, 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
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337,240 $ 233,853 $ 14,893 $ 22,556,200
U.S. Government agencies 23,834,686 53,172 92,413 23,795,445
Other securities 2,749,094 422,591 2,000 3,169,685
$ 48,921,020 $ 709,616 $ 109,306 $ 49,521,330
Held-to-maturity securities
U.S. Treasury $ 10,432,892 $ 209,508 $ - $ 10,642,400
U.S. Government agencies 36,552,480 657,930 2,048 37,208,362
States and political
subdivisions 48,465,174 1,218,108 12,144 49,671,138
Other securities 815,421 33,735 - 849,156
$ 96,265,967 $ 2,119,281 $ 14,192 $ 98,371,056
December 31, 1996
Available-for-sale securities
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
<FN>
<F1>
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, 1997, 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, 1997, 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 $11,008,435, $3,020,054, and
$7,306,453 during 1997, 1996, and 1995, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$32,386,811, $56,112,000, and $18,848,992 during 1997, 1996, and
1995, respectively. Gross gains of $489,697 and gross losses of
$1,725 were realized on dispositions in 1997. There were no
realized gains or losses in 1996. Gross gains of $1,182 and
gross losses of $-0- were realized on the dispositions in 1995.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 8,051,787 $ 8,049,800 5.5%
After one but within five years 14,285,453 14,506,400 6.2%
U.S. Government agencies
Within one year 3,994,953 3,999,700 6.1%
After one but within five years 19,585,333 19,541,020 5.8%
After ten years 254,400 254,725 6.1%
Other securities 2,749,094 3,169,685 9.0%
$ 48,921,020 $ 49,521,330
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,432,892 $ 10,642,400 6.4%
U.S. Government agencies
Within one year 2,999,150 2,997,100 5.4%
After one but within five years 18,669,684 19,008,962 6.6%
After five but within ten years 14,883,646 15,202,300 6.5%
States and political subdivisions
Within one year 3,239,829 3,286,218 9.3%
After one but within five years 13,595,854 13,865,175 7.7%
After five but within ten years 18,510,918 18,983,557 7.4%
After ten years 13,118,573 13,536,188 7.8%
Other securities
After one but within five years 315,421 323,206 8.0%
After five but within ten years 500,000 525,950 7.3%
$ 96,265,967 $ 98,371,056
<FN>
<F2>
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>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 60,592,529 $ 54,565,335
Tax exempt municipal loans 768,125 605,933
Real estate
Construction 5,861,866 8,751,021
Commercial mortgages 52,968,199 46,114,930
Residential mortgages 146,768,418 125,854,753
Other 5,869,654 7,115,749
Consumer loans 58,879,231 60,993,583
331,708,022 304,001,304
Less:
Net unamortized loan origination fees (347,839) (269,260)
Allowance for possible loan losses (2,943,000) (2,926,063)
$ 328,417,183 $ 300,805,981
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1997
and 1996
</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 $ 78,350 $ 47,052 $ 40,499 $ 165,901
Variable rate loans 93,752 30,484 41,571 165,807
$ 172,102 $ 77,536 $ 82,070 $ 331,708
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1997
</FN>
</TABLE>
Loans having recorded investments of $2,954,000 at December
31, 1997, have been identified as impaired. The total allowance
for possible loan losses related to these loans was $1,146,000.
Interest received on these loans during 1997 was $479,698.
Impaired loans had recorded investments of approximately
$5,136,000 at December 31, 1996.
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, 1997 and 1996, 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 1997 or 1996.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
<S> <C> <C> <C> <C>
1997
Aggregate of certain party loans $ 8,222,262 $ 12,488,090 $ 8,276,031 $ 12,434,321
1996
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 2,926,063 $ 2,678,386 $ 2,342,290
Provision charged to operating expenses 1,940,000 1,300,000 670,000
Loan losses:
Loans charged off (2,064,138) (1,388,422) (555,957)
Recoveries on loans previously
charged off 141,075 336,099 222,053
Balance at end of year $ 2,943,000 $ 2,926,063 $ 2,678,386
<FN>
<F6>
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, 1997.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 1,348,288 $ 1,348,288
Premises 7,027,521 7,013,942
Furniture and equipment 3,857,459 4,068,373
Leasehold improvements 1,209,113 1,149,732
13,442,381 13,580,335
Less allowance for depreciation and
amortization (7,029,016) (6,750,860)
$ 6,413,365 $ 6,829,475
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1997 and 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank
premises and equipment total $651,619 for 1997, $685,005 for
1996, and $645,816 for 1995. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling approximately $2,670,000 at
December 31, 1997.
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, 1997, additional dividends of approximately $15,900,000
could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for five of the Bank's office locations and
certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $689,887,
$726,337, and $660,121 for equipment leases, and $112,070,
$112,384, and $111,649 for building leases, in 1997, 1996, and
1995, respectively. Future minimum lease commitments as of
December 31, 1997, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<C> <C>
1998 $ 513,083
1999 121,128
2000 124,128
2001 124,128
2002 86,328
Thereafter 94,200
Total future minimum lease payments $ 1,062,995
<FN>
<F8>
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>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 2,416,401 $ 2,422,550 $ 2,166,566
State 557,218 628,788 585,606
Total current 2,973,619 3,051,338 2,752,172
Deferred:
Federal 215,949 (137,700) (198,393)
State 38,108 (24,299) (35,010)
Total deferred 254,057 (161,999) (233,403)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
<FN>
<F8>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for possible loan losses $ 776,888 $ 914,386 $ 815,315
Write-down of other real estate - 177,120 177,120
Deferred compensation 403,857 336,255 256,139
Deferred loan fees 19,823 26,863 44,051
Deferred tax asset 1,200,568 1,454,624 1,292,625
Unrealized gain on AFS securities (240,124) (97,294) (157,392)
Deferred tax liability (240,124) ( 97,294) (157,392)
Net deferred tax asset $ 960,444 $ 1,357,330 $ 1,135,233
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,495,754 $ 3,317,086 $ 2,935,722
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (896,112) (859,383) (783,011)
Nondeductible interest expense 106,329 101,534 89,491
Employee benefits (55,560) (34,685) (22,418)
Other nondeductible expenses
(nontaxable income) - net 11,146 13,515 (5,695)
State income taxes, net of
federal tax benefit 392,915 398,963 363,393
Dividend income exclusion (33,239) (34,855) (18,324)
Other 55,891 (12,836) (40,388)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
Effective tax rate 31.4% 29.6% 29.2%
<FN>
<F11>
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 1997, 1996, and 1995 amounted to
$2,927,000, $3,140,000 and $2,756,442, respectively.
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters of
credit in the normal course of business at December 31, 1997,
were $21,735,000 and $1,977,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1997,
1996, and 1995 amounted to $17,049,703, $17,206,708, and
$14,845,107, 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, 1997 and 1996,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios exceeded
the minimum standard for a "well capitalized" bank as of
September 30, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<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, 1997 Amount Ratio Amount Ratio > or= Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 61,732,093 19.68% 25,098,756 8.00% 31,373,445 10.00%
Bank 61,153,956 19.54% 25,040,651 8.00% 31,300,813 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789,093 18.74% 12,549,378 4.00% 18,824,067 6.00%
Bank 58,210,956 18.60% 12,520,325 4.00% 18,780,488 6.00%
Tier I Capital (Average)
(to Average Assets)
Consolidated 56,515,935 10.73% 21,073,801 4.00% 26,342,251 5.00%
Bank 55,946,149 10.63% 21,047,205 4.00% 26,309,006 5.00%
As of December 31, 1996
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% 11,988,374 4.00% 17,982,562 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% 20,102,944 4.00% 25,128,680 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
</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 nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<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 $684,227, $661,307 and $633,459, in 1997, 1996, and
1995, 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 (1997 - $645,985; 1996 - $620,657) purchased
in 1993 to fund the plan and the related liability (1997 -
$501,255; 1996 - $513,792) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $25,328 in 1997 and $26,436 in 1996 is
included in the above asset values. Net noncash income was
$14,133 in 1995. 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 $42,463 in
1997, $64,024 in 1996, and $106,066 in 1995.
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, net of benefits paid out in 1997
and accruals, of $173,841 for 1997, $172,871 for 1996, and
$176,727 for 1995 have been recognized in the accompanying
consolidated financial statements. In connection with this
plan, a single premium universal life insurance policy was
purchased on the life of each director who elected to
participate. Additional single premium universal life insurance
policies, totaling $385,000, were purchased in 1997 for new
participants. Net noncash income recognized on these policies
of $103,953 in 1997 and $85,249 in 1996 is included in the cash
surrender values of $2,376,124 and $1,887,171 reported in other
assets at December 31, 1997 and 1996, respectively. Net noncash
income was $51,803 in 1995.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1997 -
$819,460; 1996 - $785,330) is included in other assets, and net
noncash income recognized on this policy of $34,130 in 1997 and
net expense of $9,670 in 1996 is included in the above asset
values.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replacement/split dollar plan. These
policies have an aggregate face amount of $3,163,750.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,1997 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks $ 29,873 $ 29,873 $ 27,917 $ 27,917
Federal funds sold 12,800 12,800 - -
Securities held to maturity 96,266 98,371 118,542 119,226
Securities available for
sale 48,921 49,521 55,898 56,142
Loans, net 328,417 325,323 300,806 309,401
Accrued interest receivable 5,366 5,366 5,549 5,549
Financial liabilities
Deposits 470,282 456,557 460,573 449,129
Federal funds purchased - - 5,000 5,000
Short term borrowings 602 602 523 523
Accrued interest payable 2,794 2,794 2,539 2,539
<FN>
<F13>
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, 1997, 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
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362,178 $ 9,705,584 $ 9,774,855 $ 9,804,468 $ 38,647,085
Interest expense 4,258,739 4,330,171 4,361,715 4,353,765 17,304,390
Net interest income 5,103,439 5,375,413 5,413,140 5,450,703 21,342,695
Provision for possible loan
losses 450,000 290,000 550,000 650,000 1,940,000
Noninterest expenses, net
of noninterest income 2,394,981 2,405,847 2,388,160 1,932,079 9,121,067
Income before income taxes 2,258,458 2,679,566 2,474,980 2,868,624 10,281,628
Income taxes 556,134 795,731 917,613 958,198 3,227,676
Net income $ 1,702,324 $ 1,883,835 $ 1,557,367 $ 1,910,426 $ 7,053,952
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.35 $ 1.11 $ 1.36 $ 5.04
First Secon Third Fourth
Quarter Quarter Quarter Quarter Total
1996
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
<FN>
<F14>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its sixteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
<S> <C> <S><C> <S><C> <S><C>
Demand deposits $ 62,909 - % $ 61,509 - % $ 56,730 - %
NOW and money market accounts 166,914 3.37 158,450 3.37 149,016 3.51
Savings deposits 43,775 3.37 37,421 3.22 34,629 3.00
Time deposits of less than
$100,000 152,389 5.29 151,952 5.40 136,568 5.30
Time deposits of $100,000 or
more 37,686 5.42 34,539 5.41 32,524 5.35
Total In Domestic Offices $463,673 3.71% $443,870 3.74% $409,467 3.72%
<FN>
<F15>
Table XV - Average Amounts of Deposits and Average Rates Paid
by Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 9,308 $ 11,680 $ 7,877
3 to 12 months 25,981 22,638 18,407
Over 12 months 4,039 4,812 4,310
$ 39,328 $ 39,130 $ 30,594
<FN>
<F16>
Table XVI - Maturities of Time Deposits of $100,000 or More at
December 31
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 72 $ 142
Investment in bank subsidiary - at equity 59,565 53,870
Investment in credit life insurance company
- at cost 50 50
Investment in other securities 25 22
Dividends receivable from bank subsidiary 784 714
Cash surrender value - life insurance 651 489
Other assets - 1
Total assets $ 61,147 $ 55,288
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 220 $ 173
Dividends payable 784 714
Total liabilities 1,004 887
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 45,783 40,255
Net unrealized gain (loss) on
available-for-sale securities, net of
tax 360 146
Total stockholders' equity 60,143 54,401
Total liabilities and stockholders' equity $ 61,147 $ 55,288
<FN>
<F17>
Table XVII - Condensed Statements of Balance Sheet of Parent
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Dividends from bank subsidiary $ 1,526 $ 1,372
Other dividend income 80 85
Interest income 8 6
Other 34 28
Operating expenses 76 68
Income before equity in undistributed net
income of bank subsidiary 1,572 1,423
Equity in undistributed net income of bank
subsidiary 5,482 5,444
Net Income $ 7,054 $ 6,867
<FN>
<F18>
Table XVIII - Condensed Statements of Income 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>
Condensed Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Operating activities
Net income for the year $ 7,054 $ 6,867
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed net income
of bank subsidiary (5,482) (5,444)
Increase in other assets (98) (111)
Increase in payables 47 44
Total adjustments (5,533) (5,511)
Net cash provided by operating
activities 1,521 1,356
Net cash provided by (used in)
investing activities
Purchases of investment securities (119) (133)
Proceeds from maturities of
investment securities 119 137
Purchase of single premium life
insurance policy (135) -
Net cash provided by (used in)
investing activities (135) 4
Net cash used in financing activities
Cash dividends paid (1,456) (1,288)
Increase (decrease) in cash (70) 72
Cash at beginning of year 142 70
Cash at end of year $ 72 $ 142
<FN>
<F19>
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 1997, 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. "High Technology + High Commitment =
High Performance" was the challenge for the year as the Bank
committed to provide quality services in diverse markets and a
dynamic interest rate environment. Our customers are enjoying
the quality service of a community bank and the safety and
strength of a regional bank.
The accompanying tables plus the discussion and financial
information are presented to aid in understanding First Farmers
and Merchants Corporation's current financial position and
results of operations. The emphasis of this discussion will be
on the years 1997, 1996, and 1995; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition
depends on the quality and nature of its assets, its liability
and capital structure, the market and economic conditions, and
the quality of its personnel. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
Summary
The Bank reported net income of $7.1 million for 1997 compared
to $6.9 million in 1996 and $6.1 million in 1995. On a per
common share basis, net income was $5.04 for 1997 versus $4.90
for 1996 and $4.37 for 1995. The improvement in 1997's earnings
resulted from a strong gross margin reinforced by loan demand
that changed the mix of earning assets as higher yielding loans
were funded with maturing investment securities and an increase in
noninterest income sufficient to cover a smaller increase in
noninterest expenses and most of the increase in taxes. These
improvements were partially offset by higher additions to the allowance
for loan losses.
The return on average equity for 1997 was 12.2% compared to
13.2% for 1996 and 13.1% for 1995. The return on average
assets was 1.34% for 1997 versus 1.37% for 1996 and 1.32% for
1995.
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>
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
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 $ 314,198 9.18 % $ 28,858 * $ 290,413 9.43 % $ 27,373 * $ 276,166 9.38 % $ 25,892 *
Bank time deposits 1 - - 1 - - 2 - -
Taxable securities 113,013 6.35 7,173 118,114 6.14 7,256 104,217 6.20 6,457
Tax exempt securities 47,366 6.96 3,297 * 44,158 7.10 3,134 * 39,105 8.07 3,156 *
Federal funds sold 4,631 5.46 253 4,198 5.31 223 2,076 5.83 121
TOTAL EARNING ASSETS 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986 421,566 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 27,039 25,760 24,829
Bank premises and equipment 6,633 6,708 6,246
Other assets 15,045 13,348 11,098
TOTAL ASSETS $ 527,926 $ 502,700 $ 463,739
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 166,828 3.38 % $ 5,634 $ 158,438 3.39 % $ 5,338 $ 148,993 3.51 % $ 5,223
Savings 43,776 3.37 1,476 37,428 3.22 1,204 34,627 3.00 1,040
Time 152,389 5.29 8,063 151,973 5.40 8,210 136,605 5.30 7,245
Time over $100,000 37,680 5.43 2,045 34,554 5.40 1,866 32,522 5.35 1,740
TOTAL INTEREST BEARING
DEPOSITS 400,673 4.30 17,218 382,393 4.35 16,618 352,747 4.32 15,248
Federal funds purchased 1,016 5.80 59 1,043 5.56 58 2,415 5.92 143
Other short-term debt 538 5.02 27 622 5.79 36 565 5.49 31
TOTAL INTEREST BEARING
LIABILITIES 402,227 4.30 $17,304 384,058 4.35 $16,712 355,727 4.34 $15,422
Noninterest bearing liabilities
Demand deposits 62,903 61,509 56,742
Other liabilities 4,990 5,066 4,515
TOTAL LIABILITIES 470,120 450,633 416,984
Stockholders' equity 57,806 52,067 46,755
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 527,926 $ 502,700 $ 463,739
Spread between combined
rates earned and combined
rates paid* 3.96 % 3.96 % 4.12 %
Net yield on interest-earning
assets* 4.65 % 4.66 % 4.79 %
<FN>
<F1>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
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 amortized cost of
available-for-sale securities were used in the calculations in
this table.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<CAPTION>
1997 Compared 1996 1996 Compared 1995
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S>
Revenue earned on <C> <C> <C> <C> <C> <C>
Net loans $ 2,243 $ (758) $ 1,485 $ 1,336 $ 145 $ 1,481
Investment securities
Taxable securities (314) 231 (83) 861 (62) 799
Tax-free securities 228 (65) 163 408 (430) (22)
Federal funds sold 23 7 30 124 (22) 102
Total interest earning
assets 2,180 (585) 1,595 2,729 (369) 2,360
Interest paid on
NOW and money market
accounts 283 13 296 331 (216) 115
Savings deposits 204 68 272 84 80 164
Time deposits 23 (170) (147) 815 150 965
Time over $100,000 169 10 179 109 17 126
Federal funds purchased (2) 3 1 (81) (4) (85)
Short term debt (5) (4) (9) 3 2 5
Total interest-bearing
funds 672 (80) 592 1,261 29 1,290
Net interest earnings 1,508 $ (505) $ 1,003 $ 1,468 $ (398) $ 1,070
</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, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
investment securities. Bank qualified 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 stockholders. The first graph illustrates in thousands of
dollars, the categories of average earning assets and the
portion each category is of the total for the last three years.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Investment
Loans Securities Other
<S> <C> <C> <C>
1997 $314,198 $160,722 $4,613
1996 290,413 162,188 4,199
1995 276,166 143,358 2,078
</TABLE>
Average earning assets increased 5.0% in 1997 compared to an
8.4% increase in 1996 and a 3.0% increase in 1995. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1997, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 8.2% growth
from 1996 to 1997, a 5.2% growth from 1995 to 1996, and an 11.5%
growth from 1994 to 1995. Average investments accounted for the
remaining balance of average earning assets at December 31,
1997, decreasing .9% from year end 1996. Some of the proceeds
from maturities and calls of investment securities was used to
fund the expanding loan demand during the year. Average
investments increased 14.5% in 1996. The Bank purchased certain
assets and assumed certain deposit liabilities of two branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. Most of the increase in investments during 1996 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. Average total assets increased during
the last three years as evidenced by a 5.0% growth from 1996 to
1997, an 8.4% growth from 1995 to 1996, and a 2.6% growth from
1994 to 1995.
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 Noninterest_Bearing
Deposits Deposits Other
<S> <C> <C> <C>
1997 $390,077 $80,205 $ -
1996 382,393 61,509 1,043
1995 352,747 56,742 3,526
</TABLE>
The bank's average deposits grew during the last three years
reflecting a 4.4% growth from 1996 to 1997, an 8.4% growth from
1995 to 1996, and a 1.3% growth from 1994 to 1995. Short and
medium term rates remained competitive compared to longer term
rates during 1997 and some depositors left money in or moved
money back into interest-bearing transaction accounts, which
increased 5.3% during 1997 and 6.3% in 1996. However, over half
of the increase during 1996 was attributable to the acquisition.
Average interest-bearing checking accounts decreased 7.6 % in
1995 as investors took advantage of higher certificate of
deposit rates. Average savings deposits increased almost 17.0%
during 1997 and 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. Average certificates of deposit under
$100,000 increased .3% during 1997, 11.3% during 1996, 60.0%
from the acquisition, and 8.0% in 1995. Certificates of deposit
over $100,000 increased 9.1% in 1997 compared to 6.3% in 1996,
87.8% from the acquisition, and 24.8% in 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1997, 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, 1997, 1996, and 1995 was 4.65%, 4.66%, and 4.79% respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1997 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 12,800 $ - $ - $ - $ 12,800
Taxable investment
securities 3,928 7,989 5,000 80,574 97,491
Tax-exempt investment
securities 1,151 720 1,150 45,275 48,296
Loans and leases, net of
unearned 61,297 45,612 65,193 159,606 331,708
Total earning assets 79,176 54,321 71,343 285,455 490,295
Interest-bearing
liabilities
NOW and money market
accounts 48,546 - 66,832 40,656 156,034
Savings - - 44,170 - 44,170
Time 42,702 30,421 54,807 22,614 150,544
Time over $100,000 10,242 8,917 16,536 3,634 39,329
Other short-term debt 602 - - - 602
Total interest
bearing liabilities 102,092 39,338 182,345 66,904 $ 390,679
Noninterest-bearing, net (99,616)
Net asset/liability
funding gap (22,916) 14,983 (111,002) 118,935
Cumulative net asset/
liability funding gap $ (22,916) $ (7,933) $ (118,935) $ -
<FN>
<F2>
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 & 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, 1997.
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 $3.0 million at December
31, 1997, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent .9% of gross loans.
Commercial loans comprised $.6 million of the total, with loans
secured by real estate accounting for $1.4 million, and
installment loans $1.0 million. The gross interest income that
would have been recorded during 1997 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 $431, $374, and $365 thousand for
the years ended December 31, 1997, 1996, and 1995 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.
The bar graph on the bottom of this page shows the increase in
average net loans (in thousands of dollars) and the line shows
the ratio of net loan charge offs to average loans. The ratio
at December 31, 1997 was .61%. Management monitoring found and
corrected a problem in consumer loan underwriting that
contributed to the higher net charge off percentage in 1997.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1981 $ 54,908 .0027
1982 60,119 .0077
1983 66,964 .0039
1984 80,055 .0036
1985 98,353 .0044
1986 120,243 .0036
1987 142,959 .0077
1988 154,506 .0027
1989 163,003 .0032
1990 172,749 .0030
1991 182,561 .0037
1992 215,158 .0023
1993 233,608 .0030
1994 247,791 .0014
1995 276,166 .0012
1996 290,413 .0036
1997 314,198 .0061
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,608
Balance of allowance for
possible loan losses at
beginning of year $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Loans charged-off:
Loans secured by real
estate 88 368 15 135 396
Commercial and industrial
loans 605 141 170 42 222
Individuals 1,371 879 371 246 230
TOTAL LOANS CHARGED
OFF 2,064 1,388 556 423 848
Recoveries of loans
previously charged off:
Loans secured by real
estate 8 111 97 9 56
Commercial and industrial
loans 53 42 14 36 52
Individuals 80 183 111 36 40
TOTAL RECOVERIES 141 336 222 81 148
NET LOANS
CHARGED-O 1,923 1,052 334 342 700
Provision charged to
operating expenses 1,940 1,300 670 660 470
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Ratio of net charge-offs
during the period to average
loans outstanding 0.61% 0.36% 0.12% 0.14% 0.30%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1997, the Corporation had a ratio of
average tier 1 capital to average assets of 10.73%. This
compares to a ratio of average tier 1 capital to average assets
of 10.36% at December 31, 1996, and 10.08% at December 31, 1995.
Cash dividends declared in 1997 were 11.2% more than those paid
in 1996. The dividend to net income ratio was 22%. Additional
dividends of approximately $15.9 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, 1997, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 18.7% and 19.7% respectively. At
December 31, 1996, the comparable ratios were 17.7% and 18.7%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital.
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>
1991 $30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS COPROATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 4.2% in 1997 enhanced by loan
growth in all the market areas the Bank serves. Interest and
fees earned on loans increased 5.5% in 1997 accounting for 74.6%
of gross interest income. Interest earned on investment
securities and other investments increased .7% in 1997 rounding
out gross interest income contributing 25.4%. Total interest
income increased 7.5% in 1996 and 11.9% in 1995.
Interest Expense
Total interest expense increased 3.6% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares
favorably to a 8.4% increase in 1996, about half of which can be
attributed to the acquisition, and a 19.9% increase in 1995.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. This
contributed to the strong gross margin achieved during 1997.
The net interest margin (tax equivalent net interest income
divided by average earning assets) was 4.7% at the end of 1997
and 1996 and 4.8% at the end of 1995.
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 19.6% during 1997 led by fees on
deposits. 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. This compares to a 28.4% increase
in 1996 and a 14.9% increase in 1995.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1997 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 $1,471 21.2%
Other service fees 845 12.2%
Securities gains 488 7.0%
Fees on deposits 3,744 53.9%
Other 394 5.7%
</TABLE>
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1997 which compares favorably with the
5.8% increase in 1996. The increase in 1995 was 6.2%.
Increased productivity fostered by our technology improvements
as the learning curve diminished and cost control efforts
contributed to this cost containment. Included in this category
is net occupancy expense for an additional office opened in 1997
and furniture and equipment, which includes technology expenses,
that was down over 5% from 1996.
A pie chart is included at this point in the materials sent to
out stockholders illustrating the composition of noninterest
expense in 1997 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 $7,319 45.6%
Furniture and equipment 1,501 9.3%
Occupancy 1,317 8.2%
Other 5,927 36.9%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,841,420 $ 27,343,817 $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment
securities
Taxable interest 6,802,934 6,892,118 6,179,492 7,012,626 6,925,404
Exempt from federal
income tax 2,488,475 2,366,764 2,156,813 2,184,666 1,857,168
Dividends 260,759 256,951 177,790 204,948 72,054
9,552,168 9,515,833 8,514,095 9,402,240 8,854,626
Other interest
income 253,497 223,019 121,492 284,384 347,287
TOTAL INTEREST
INCOME 38,647,085 37,082,669 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 17,218,537 16,617,525 15,247,875 12,770,618 11,998,235
Interest on other short
term borrowings 85,853 94,232 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 17,304,390 16,711,757 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 21,342,695 20,370,912 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES 1,940,000 1,300,000 670,000 660,000 470,000
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 19,402,695 19,070,912 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,470,568 1,323,525 1,251,642 1,249,359 863,952
Service fees on deposit
accounts 3,744,381 3,373,805 2,697,332 2,317,992 2,206,026
Other service fees,
commissions, and fees 845,072 745,523 300,407 336,758 509,009
Other operating income 394,322 363,430 322,634 319,466 315,108
Securities gains (losses) 487,972 - 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 6,942,315 5,806,283 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee
benefits 7,319,460 7,030,588 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,316,588 1,211,067 1,279,434 1,190,678 1,070,971
Furniture and equipment
expense 1,500,486 1,580,753 1,382,769 1,069,856 889,848
Deposit insurance 57,004 6,549 499,709 890,646 826,966
Other operating expenses 5,869,844 5,292,103 4,557,307 4,109,461 4,180,105
TOTAL NONINTEREST
EXPENSES 16,063,382 15,121,060 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,281,628 9,756,135 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES 3,227,676 2,889,339 2,518,769 2,203,746 2,220,965
NET INCOME $ 7,053,952 $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE
(1,400,000 outstanding
shares) $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
</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 2.7% higher in 1997 than in 1996. As indicated
earlier, the improvement in 1997's earnings resulted from a
strong gross margin reinforced by loans increasing as a
percentage of earning assets, an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses,
and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan
losses associated with a corrected loan underwriting problem.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have been adopted by the Corporation as follows:
(1) Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" requires a reconciliation of the
numerators and the denominators of the basic and diluted
per-share computation for income from continuing operations.
The statement is effective prospectively for earnings per share
computation for both interim and annual periods ending after
December 31, 1997. Because the Corporation has no potential
common stock outstanding, it is required to present only basic
earnings per share and its presentation of earnings per share
did not change. (2) Statement of Financial Accounting Standards
No. 129 (SFAS 129), "Disclosure of Information about Capital Structure"
requires an entity to explain, in summary form within its
financial statements, the pertinent rights and privileges of the
various securities outstanding. The Corporation only has one
class of common stock outstanding and this statement had no
material effect on the financial statements.
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Corporation as
follows: (1) Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income" purposes that
an entity report a measure of all changes in equity that result
from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as
owners. The statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe this
statement will have any material effect on future financial
statements except for disclosures. (2) Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information" establishes
guidelines for reporting financial information about an
operating segment or component of an enterprise. The statement
is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any
material effect on future financial statements except for
disclosures.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force has been established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, or are in the process of
being obtained, from our software and hardware vendors,
confirming their Year 2000 compatibility; and plans are in place
for testing our systems' compatibility before June 30, 1998.
Management believes that our information systems are well on
their way to being Year 2000 compliant.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1997, had a
market value of $109 million and were held by 1,618 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 tables below show 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.
These tables were shown graphically in the materials sent to our
stockholders.
<TABLE>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <C> <C> <C> <C>
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
First quarter $ 67.00 $ 65.00 $
Second quarter 69.00 69.00 0.53
1997 Third quarter 72.00 70.00
Fourth quarter 78.00 72.00 0.56
$ 1.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE DATA
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 527,926 $ 502,700 $ 463,739 $ 451,953 $ 420,760
AVERAGE LOANS (NET) $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,609
AVERAGE DEPOSITS $ 463,576 $ 443,902 $ 409,489 $ 404,412 $ 378,782
RETURN ON EQUITY AND
ASSETS
Return on average
assets 1.34% 1.37% 1.32% 1.23% 1.25%
Return on beginning
equity 12.97% 14.01% 13.95% 14.11% 14.93%
Average tier 1
capital to average
assets 10.73% 10.36% 10.08% 9.25% 8.90%
COMMON DIVIDEND PAYOUT
RATIO
Earnings per shar $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
Cash dividends per
share $ 1.09 $ 0.98 $ 0.88 $ 0.80 $ 0.73
Ratio 22% 20% 20% 20% 19%
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 39,581 $ 37,986 $ 35,626 $ 32,039 $ 29,465
INTEREST EXPENSE 17,304 16,712 15,422 12,864 12,037
$ 22,277 $ 21,274 $ 20,204 $ 19,175 $ 17,428
NET INTEREST MARGIN* 4.65% 4.66% 4.79% 4.68% 4.58%
<FN>
<F3>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
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 a part
of the Annual Report to Stockholders which is included in this
filing.
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, 1997, 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 fifteen (15) 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 and Crockett 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. At December 31, 1997, approximately $8.9
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
Securities
Investments are classified in three categories and accounted
for as follows:
Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Debt and equity securities that are bought and held
principally for the purpose of selling them in
<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)
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 deferred
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 payoff generally are
stated at their outstanding unpaid principal balances net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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.
When a loan is collateral dependent, impairment is measured
based on the observable market price or the fair value of the
collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Interest on loans is accrued 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 nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment. Interest income on loans in
nonaccrual status is recognized only to the extent of the excess
of cash payments received over principal payments due.
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 $410 thousand at December 31, 1997, and $450
thousand at December 31, 1996.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through
provisions for loan losses charged against income. Loan quality
is monitored by Loan Review and
<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)
the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and
subsequent recoveries, if any, are credited to the allowance
account in the period such determination is made. The adequacy
of the allowance for possible loan losses is evaluated quarterly
in conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1997 - $182,613; 1996 - $224,212; and 1995 - $168,020.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share". which supersedes APB Opinion No.
15. This statement requires the presentation of earnings per
share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Because the
Corporation has no potential common stock outstanding, it is
required to present only basic earnings per share and its
presentation of earnings per share will not change. Earnings
per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each
period presented.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $116,315,234 and
$103,540,673 at December 31, 1997 and 1996, respectively (fair
value: 1997 - $117,969,544; 1996 - $104,061,311), 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, 1997, 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
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337,240 $ 233,853 $ 14,893 $ 22,556,200
U.S. Government agencies 23,834,686 53,172 92,413 23,795,445
Other securities 2,749,094 422,591 2,000 3,169,685
$ 48,921,020 $ 709,616 $ 109,306 $ 49,521,330
Held-to-maturity securities
U.S. Treasury $ 10,432,892 $ 209,508 $ - $ 10,642,400
U.S. Government agencies 36,552,480 657,930 2,048 37,208,362
States and political
subdivisions 48,465,174 1,218,108 12,144 49,671,138
Other securities 815,421 33,735 - 849,156
$ 96,265,967 $ 2,119,281 $ 14,192 $ 98,371,056
December 31, 1996
Available-for-sale securities
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
<FN>
<F1>
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, 1997, 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, 1997, 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 $11,008,435, $3,020,054, and
$7,306,453 during 1997, 1996, and 1995, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$32,386,811, $56,112,000, and $18,848,992 during 1997, 1996, and
1995, respectively. Gross gains of $489,697 and gross losses of
$1,725 were realized on dispositions in 1997. There were no
realized gains or losses in 1996. Gross gains of $1,182 and
gross losses of $-0- were realized on the dispositions in 1995.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 8,051,787 $ 8,049,800 5.5%
After one but within five years 14,285,453 14,506,400 6.2%
U.S. Government agencies
Within one year 3,994,953 3,999,700 6.1%
After one but within five years 19,585,333 19,541,020 5.8%
After ten years 254,400 254,725 6.1%
Other securities 2,749,094 3,169,685 9.0%
$ 48,921,020 $ 49,521,330
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,432,892 $ 10,642,400 6.4%
U.S. Government agencies
Within one year 2,999,150 2,997,100 5.4%
After one but within five years 18,669,684 19,008,962 6.6%
After five but within ten years 14,883,646 15,202,300 6.5%
States and political subdivisions
Within one year 3,239,829 3,286,218 9.3%
After one but within five years 13,595,854 13,865,175 7.7%
After five but within ten years 18,510,918 18,983,557 7.4%
After ten years 13,118,573 13,536,188 7.8%
Other securities
After one but within five years 315,421 323,206 8.0%
After five but within ten years 500,000 525,950 7.3%
$ 96,265,967 $ 98,371,056
<FN>
<F2>
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>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 60,592,529 $ 54,565,335
Tax exempt municipal loans 768,125 605,933
Real estate
Construction 5,861,866 8,751,021
Commercial mortgages 52,968,199 46,114,930
Residential mortgages 146,768,418 125,854,753
Other 5,869,654 7,115,749
Consumer loans 58,879,231 60,993,583
331,708,022 304,001,304
Less:
Net unamortized loan origination fees (347,839) (269,260)
Allowance for possible loan losses (2,943,000) (2,926,063)
$ 328,417,183 $ 300,805,981
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1997
and 1996
</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 $ 78,350 $ 47,052 $ 40,499 $ 165,901
Variable rate loans 93,752 30,484 41,571 165,807
$ 172,102 $ 77,536 $ 82,070 $ 331,708
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1997
</FN>
</TABLE>
Loans having recorded investments of $2,954,000 at December
31, 1997, have been identified as impaired. The total allowance
for possible loan losses related to these loans was $1,146,000.
Interest received on these loans during 1997 was $479,698.
Impaired loans had recorded investments of approximately
$5,136,000 at December 31, 1996.
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, 1997 and 1996, 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 1997 or 1996.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
<S> <C> <C> <C> <C>
1997
Aggregate of certain party loans $ 8,222,262 $ 12,488,090 $ 8,276,031 $ 12,434,321
1996
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 2,926,063 $ 2,678,386 $ 2,342,290
Provision charged to operating expenses 1,940,000 1,300,000 670,000
Loan losses:
Loans charged off (2,064,138) (1,388,422) (555,957)
Recoveries on loans previously
charged off 141,075 336,099 222,053
Balance at end of year $ 2,943,000 $ 2,926,063 $ 2,678,386
<FN>
<F6>
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, 1997.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 1,348,288 $ 1,348,288
Premises 7,027,521 7,013,942
Furniture and equipment 3,857,459 4,068,373
Leasehold improvements 1,209,113 1,149,732
13,442,381 13,580,335
Less allowance for depreciation and
amortization (7,029,016) (6,750,860)
$ 6,413,365 $ 6,829,475
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1997 and 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank
premises and equipment total $651,619 for 1997, $685,005 for
1996, and $645,816 for 1995. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling approximately $2,670,000 at
December 31, 1997.
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, 1997, additional dividends of approximately $15,900,000
could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for five of the Bank's office locations and
certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $689,887,
$726,337, and $660,121 for equipment leases, and $112,070,
$112,384, and $111,649 for building leases, in 1997, 1996, and
1995, respectively. Future minimum lease commitments as of
December 31, 1997, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<C> <C>
1998 $ 513,083
1999 121,128
2000 124,128
2001 124,128
2002 86,328
Thereafter 94,200
Total future minimum lease payments $ 1,062,995
<FN>
<F8>
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>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 2,416,401 $ 2,422,550 $ 2,166,566
State 557,218 628,788 585,606
Total current 2,973,619 3,051,338 2,752,172
Deferred:
Federal 215,949 (137,700) (198,393)
State 38,108 (24,299) (35,010)
Total deferred 254,057 (161,999) (233,403)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
<FN>
<F8>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for possible loan losses $ 776,888 $ 914,386 $ 815,315
Write-down of other real estate - 177,120 177,120
Deferred compensation 403,857 336,255 256,139
Deferred loan fees 19,823 26,863 44,051
Deferred tax asset 1,200,568 1,454,624 1,292,625
Unrealized gain on AFS securities (240,124) (97,294) (157,392)
Deferred tax liability (240,124) ( 97,294) (157,392)
Net deferred tax asset $ 960,444 $ 1,357,330 $ 1,135,233
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,495,754 $ 3,317,086 $ 2,935,722
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (896,112) (859,383) (783,011)
Nondeductible interest expense 106,329 101,534 89,491
Employee benefits (55,560) (34,685) (22,418)
Other nondeductible expenses
(nontaxable income) - net 11,146 13,515 (5,695)
State income taxes, net of
federal tax benefit 392,915 398,963 363,393
Dividend income exclusion (33,239) (34,855) (18,324)
Other 55,891 (12,836) (40,388)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
Effective tax rate 31.4% 29.6% 29.2%
<FN>
<F11>
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 1997, 1996, and 1995 amounted to
$2,927,000, $3,140,000 and $2,756,442, respectively.
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters of
credit in the normal course of business at December 31, 1997,
were $21,735,000 and $1,977,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1997,
1996, and 1995 amounted to $17,049,703, $17,206,708, and
$14,845,107, 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, 1997 and 1996,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios exceeded
the minimum standard for a "well capitalized" bank as of
September 30, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<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, 1997 Amount Ratio Amount Ratio > or= Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 61,732,093 19.68% 25,098,756 8.00% 31,373,445 10.00%
Bank 61,153,956 19.54% 25,040,651 8.00% 31,300,813 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789,093 18.74% 12,549,378 4.00% 18,824,067 6.00%
Bank 58,210,956 18.60% 12,520,325 4.00% 18,780,488 6.00%
Tier I Capital (Average)
(to Average Assets)
Consolidated 56,515,935 10.73% 21,073,801 4.00% 26,342,251 5.00%
Bank 55,946,149 10.63% 21,047,205 4.00% 26,309,006 5.00%
As of December 31, 1996
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% 11,988,374 4.00% 17,982,562 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% 20,102,944 4.00% 25,128,680 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
</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 nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<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 $684,227, $661,307 and $633,459, in 1997, 1996, and
1995, 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 (1997 - $645,985; 1996 - $620,657) purchased
in 1993 to fund the plan and the related liability (1997 -
$501,255; 1996 - $513,792) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $25,328 in 1997 and $26,436 in 1996 is
included in the above asset values. Net noncash income was
$14,133 in 1995. 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 $42,463 in
1997, $64,024 in 1996, and $106,066 in 1995.
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, net of benefits paid out in 1997
and accruals, of $173,841 for 1997, $172,871 for 1996, and
$176,727 for 1995 have been recognized in the accompanying
consolidated financial statements. In connection with this
plan, a single premium universal life insurance policy was
purchased on the life of each director who elected to
participate. Additional single premium universal life insurance
policies, totaling $385,000, were purchased in 1997 for new
participants. Net noncash income recognized on these policies
of $103,953 in 1997 and $85,249 in 1996 is included in the cash
surrender values of $2,376,124 and $1,887,171 reported in other
assets at December 31, 1997 and 1996, respectively. Net noncash
income was $51,803 in 1995.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1997 -
$819,460; 1996 - $785,330) is included in other assets, and net
noncash income recognized on this policy of $34,130 in 1997 and
net expense of $9,670 in 1996 is included in the above asset
values.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replacement/split dollar plan. These
policies have an aggregate face amount of $3,163,750.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,1997 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks $ 29,873 $ 29,873 $ 27,917 $ 27,917
Federal funds sold 12,800 12,800 - -
Securities held to maturity 96,266 98,371 118,542 119,226
Securities available for
sale 48,921 49,521 55,898 56,142
Loans, net 328,417 325,323 300,806 309,401
Accrued interest receivable 5,366 5,366 5,549 5,549
Financial liabilities
Deposits 470,282 456,557 460,573 449,129
Federal funds purchased - - 5,000 5,000
Short term borrowings 602 602 523 523
Accrued interest payable 2,794 2,794 2,539 2,539
<FN>
<F13>
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, 1997, 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
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362,178 $ 9,705,584 $ 9,774,855 $ 9,804,468 $ 38,647,085
Interest expense 4,258,739 4,330,171 4,361,715 4,353,765 17,304,390
Net interest income 5,103,439 5,375,413 5,413,140 5,450,703 21,342,695
Provision for possible loan
losses 450,000 290,000 550,000 650,000 1,940,000
Noninterest expenses, net
of noninterest income 2,394,981 2,405,847 2,388,160 1,932,079 9,121,067
Income before income taxes 2,258,458 2,679,566 2,474,980 2,868,624 10,281,628
Income taxes 556,134 795,731 917,613 958,198 3,227,676
Net income $ 1,702,324 $ 1,883,835 $ 1,557,367 $ 1,910,426 $ 7,053,952
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.35 $ 1.11 $ 1.36 $ 5.04
First Secon Third Fourth
Quarter Quarter Quarter Quarter Total
1996
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
<FN>
<F14>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its sixteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
<S> <C> <S><C> <S><C> <S><C>
Demand deposits $ 62,909 - % $ 61,509 - % $ 56,730 - %
NOW and money market accounts 166,914 3.37 158,450 3.37 149,016 3.51
Savings deposits 43,775 3.37 37,421 3.22 34,629 3.00
Time deposits of less than
$100,000 152,389 5.29 151,952 5.40 136,568 5.30
Time deposits of $100,000 or
more 37,686 5.42 34,539 5.41 32,524 5.35
Total In Domestic Offices $463,673 3.71% $443,870 3.74% $409,467 3.72%
<FN>
<F15>
Table XV - Average Amounts of Deposits and Average Rates Paid
by Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 9,308 $ 11,680 $ 7,877
3 to 12 months 25,981 22,638 18,407
Over 12 months 4,039 4,812 4,310
$ 39,328 $ 39,130 $ 30,594
<FN>
<F16>
Table XVI - Maturities of Time Deposits of $100,000 or More at
December 31
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 72 $ 142
Investment in bank subsidiary - at equity 59,565 53,870
Investment in credit life insurance company
- at cost 50 50
Investment in other securities 25 22
Dividends receivable from bank subsidiary 784 714
Cash surrender value - life insurance 651 489
Other assets - 1
Total assets $ 61,147 $ 55,288
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 220 $ 173
Dividends payable 784 714
Total liabilities 1,004 887
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 45,783 40,255
Net unrealized gain (loss) on
available-for-sale securities, net of
tax 360 146
Total stockholders' equity 60,143 54,401
Total liabilities and stockholders' equity $ 61,147 $ 55,288
<FN>
<F17>
Table XVII - Condensed Statements of Balance Sheet of Parent
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Dividends from bank subsidiary $ 1,526 $ 1,372
Other dividend income 80 85
Interest income 8 6
Other 34 28
Operating expenses 76 68
Income before equity in undistributed net
income of bank subsidiary 1,572 1,423
Equity in undistributed net income of bank
subsidiary 5,482 5,444
Net Income $ 7,054 $ 6,867
<FN>
<F18>
Table XVIII - Condensed Statements of Income 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>
Condensed Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Operating activities
Net income for the year $ 7,054 $ 6,867
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed net income
of bank subsidiary (5,482) (5,444)
Increase in other assets (98) (111)
Increase in payables 47 44
Total adjustments (5,533) (5,511)
Net cash provided by operating
activities 1,521 1,356
Net cash provided by (used in)
investing activities
Purchases of investment securities (119) (133)
Proceeds from maturities of
investment securities 119 137
Purchase of single premium life
insurance policy (135) -
Net cash provided by (used in)
investing activities (135) 4
Net cash used in financing activities
Cash dividends paid (1,456) (1,288)
Increase (decrease) in cash (70) 72
Cash at beginning of year 142 70
Cash at end of year $ 72 $ 142
<FN>
<F19>
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 1997, 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. "High Technology + High Commitment =
High Performance" was the challenge for the year as the Bank
committed to provide quality services in diverse markets and a
dynamic interest rate environment. Our customers are enjoying
the quality service of a community bank and the safety and
strength of a regional bank.
The accompanying tables plus the discussion and financial
information are presented to aid in understanding First Farmers
and Merchants Corporation's current financial position and
results of operations. The emphasis of this discussion will be
on the years 1997, 1996, and 1995; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition
depends on the quality and nature of its assets, its liability
and capital structure, the market and economic conditions, and
the quality of its personnel. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
Summary
The Bank reported net income of $7.1 million for 1997 compared
to $6.9 million in 1996 and $6.1 million in 1995. On a per
common share basis, net income was $5.04 for 1997 versus $4.90
for 1996 and $4.37 for 1995. The improvement in 1997's earnings
resulted from a strong gross margin reinforced by loan demand
that changed the mix of earning assets as higher yielding loans
were funded with maturing investment securities and an increase in
noninterest income sufficient to cover a smaller increase in
noninterest expenses and most of the increase in taxes. These
improvements were partially offset by higher additions to the allowance
for loan losses.
The return on average equity for 1997 was 12.2% compared to
13.2% for 1996 and 13.1% for 1995. The return on average
assets was 1.34% for 1997 versus 1.37% for 1996 and 1.32% for
1995.
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>
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
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 $ 314,198 9.18 % $ 28,858 * $ 290,413 9.43 % $ 27,373 * $ 276,166 9.38 % $ 25,892 *
Bank time deposits 1 - - 1 - - 2 - -
Taxable securities 113,013 6.35 7,173 118,114 6.14 7,256 104,217 6.20 6,457
Tax exempt securities 47,366 6.96 3,297 * 44,158 7.10 3,134 * 39,105 8.07 3,156 *
Federal funds sold 4,631 5.46 253 4,198 5.31 223 2,076 5.83 121
TOTAL EARNING ASSETS 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986 421,566 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 27,039 25,760 24,829
Bank premises and equipment 6,633 6,708 6,246
Other assets 15,045 13,348 11,098
TOTAL ASSETS $ 527,926 $ 502,700 $ 463,739
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 166,828 3.38 % $ 5,634 $ 158,438 3.39 % $ 5,338 $ 148,993 3.51 % $ 5,223
Savings 43,776 3.37 1,476 37,428 3.22 1,204 34,627 3.00 1,040
Time 152,389 5.29 8,063 151,973 5.40 8,210 136,605 5.30 7,245
Time over $100,000 37,680 5.43 2,045 34,554 5.40 1,866 32,522 5.35 1,740
TOTAL INTEREST BEARING
DEPOSITS 400,673 4.30 17,218 382,393 4.35 16,618 352,747 4.32 15,248
Federal funds purchased 1,016 5.80 59 1,043 5.56 58 2,415 5.92 143
Other short-term debt 538 5.02 27 622 5.79 36 565 5.49 31
TOTAL INTEREST BEARING
LIABILITIES 402,227 4.30 $17,304 384,058 4.35 $16,712 355,727 4.34 $15,422
Noninterest bearing liabilities
Demand deposits 62,903 61,509 56,742
Other liabilities 4,990 5,066 4,515
TOTAL LIABILITIES 470,120 450,633 416,984
Stockholders' equity 57,806 52,067 46,755
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 527,926 $ 502,700 $ 463,739
Spread between combined
rates earned and combined
rates paid* 3.96 % 3.96 % 4.12 %
Net yield on interest-earning
assets* 4.65 % 4.66 % 4.79 %
<FN>
<F1>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
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 amortized cost of
available-for-sale securities were used in the calculations in
this table.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<CAPTION>
1997 Compared 1996 1996 Compared 1995
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S>
Revenue earned on <C> <C> <C> <C> <C> <C>
Net loans $ 2,243 $ (758) $ 1,485 $ 1,336 $ 145 $ 1,481
Investment securities
Taxable securities (314) 231 (83) 861 (62) 799
Tax-free securities 228 (65) 163 408 (430) (22)
Federal funds sold 23 7 30 124 (22) 102
Total interest earning
assets 2,180 (585) 1,595 2,729 (369) 2,360
Interest paid on
NOW and money market
accounts 283 13 296 331 (216) 115
Savings deposits 204 68 272 84 80 164
Time deposits 23 (170) (147) 815 150 965
Time over $100,000 169 10 179 109 17 126
Federal funds purchased (2) 3 1 (81) (4) (85)
Short term debt (5) (4) (9) 3 2 5
Total interest-bearing
funds 672 (80) 592 1,261 29 1,290
Net interest earnings 1,508 $ (505) $ 1,003 $ 1,468 $ (398) $ 1,070
</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, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
investment securities. Bank qualified 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 stockholders. The first graph illustrates in thousands of
dollars, the categories of average earning assets and the
portion each category is of the total for the last three years.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Investment
Loans Securities Other
<S> <C> <C> <C>
1997 $314,198 $160,722 $4,613
1996 290,413 162,188 4,199
1995 276,166 143,358 2,078
</TABLE>
Average earning assets increased 5.0% in 1997 compared to an
8.4% increase in 1996 and a 3.0% increase in 1995. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1997, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 8.2% growth
from 1996 to 1997, a 5.2% growth from 1995 to 1996, and an 11.5%
growth from 1994 to 1995. Average investments accounted for the
remaining balance of average earning assets at December 31,
1997, decreasing .9% from year end 1996. Some of the proceeds
from maturities and calls of investment securities was used to
fund the expanding loan demand during the year. Average
investments increased 14.5% in 1996. The Bank purchased certain
assets and assumed certain deposit liabilities of two branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. Most of the increase in investments during 1996 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. Average total assets increased during
the last three years as evidenced by a 5.0% growth from 1996 to
1997, an 8.4% growth from 1995 to 1996, and a 2.6% growth from
1994 to 1995.
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 Noninterest_Bearing
Deposits Deposits Other
<S> <C> <C> <C>
1997 $390,077 $80,205 $ -
1996 382,393 61,509 1,043
1995 352,747 56,742 3,526
</TABLE>
The bank's average deposits grew during the last three years
reflecting a 4.4% growth from 1996 to 1997, an 8.4% growth from
1995 to 1996, and a 1.3% growth from 1994 to 1995. Short and
medium term rates remained competitive compared to longer term
rates during 1997 and some depositors left money in or moved
money back into interest-bearing transaction accounts, which
increased 5.3% during 1997 and 6.3% in 1996. However, over half
of the increase during 1996 was attributable to the acquisition.
Average interest-bearing checking accounts decreased 7.6 % in
1995 as investors took advantage of higher certificate of
deposit rates. Average savings deposits increased almost 17.0%
during 1997 and 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. Average certificates of deposit under
$100,000 increased .3% during 1997, 11.3% during 1996, 60.0%
from the acquisition, and 8.0% in 1995. Certificates of deposit
over $100,000 increased 9.1% in 1997 compared to 6.3% in 1996,
87.8% from the acquisition, and 24.8% in 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1997, 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, 1997, 1996, and 1995 was 4.65%, 4.66%, and 4.79% respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1997 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 12,800 $ - $ - $ - $ 12,800
Taxable investment
securities 3,928 7,989 5,000 80,574 97,491
Tax-exempt investment
securities 1,151 720 1,150 45,275 48,296
Loans and leases, net of
unearned 61,297 45,612 65,193 159,606 331,708
Total earning assets 79,176 54,321 71,343 285,455 490,295
Interest-bearing
liabilities
NOW and money market
accounts 48,546 - 66,832 40,656 156,034
Savings - - 44,170 - 44,170
Time 42,702 30,421 54,807 22,614 150,544
Time over $100,000 10,242 8,917 16,536 3,634 39,329
Other short-term debt 602 - - - 602
Total interest
bearing liabilities 102,092 39,338 182,345 66,904 $ 390,679
Noninterest-bearing, net (99,616)
Net asset/liability
funding gap (22,916) 14,983 (111,002) 118,935
Cumulative net asset/
liability funding gap $ (22,916) $ (7,933) $ (118,935) $ -
<FN>
<F2>
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 & 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, 1997.
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 $3.0 million at December
31, 1997, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent .9% of gross loans.
Commercial loans comprised $.6 million of the total, with loans
secured by real estate accounting for $1.4 million, and
installment loans $1.0 million. The gross interest income that
would have been recorded during 1997 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 $431, $374, and $365 thousand for
the years ended December 31, 1997, 1996, and 1995 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.
The bar graph on the bottom of this page shows the increase in
average net loans (in thousands of dollars) and the line shows
the ratio of net loan charge offs to average loans. The ratio
at December 31, 1997 was .61%. Management monitoring found and
corrected a problem in consumer loan underwriting that
contributed to the higher net charge off percentage in 1997.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1981 $ 54,908 .0027
1982 60,119 .0077
1983 66,964 .0039
1984 80,055 .0036
1985 98,353 .0044
1986 120,243 .0036
1987 142,959 .0077
1988 154,506 .0027
1989 163,003 .0032
1990 172,749 .0030
1991 182,561 .0037
1992 215,158 .0023
1993 233,608 .0030
1994 247,791 .0014
1995 276,166 .0012
1996 290,413 .0036
1997 314,198 .0061
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,608
Balance of allowance for
possible loan losses at
beginning of year $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Loans charged-off:
Loans secured by real
estate 88 368 15 135 396
Commercial and industrial
loans 605 141 170 42 222
Individuals 1,371 879 371 246 230
TOTAL LOANS CHARGED
OFF 2,064 1,388 556 423 848
Recoveries of loans
previously charged off:
Loans secured by real
estate 8 111 97 9 56
Commercial and industrial
loans 53 42 14 36 52
Individuals 80 183 111 36 40
TOTAL RECOVERIES 141 336 222 81 148
NET LOANS
CHARGED-O 1,923 1,052 334 342 700
Provision charged to
operating expenses 1,940 1,300 670 660 470
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Ratio of net charge-offs
during the period to average
loans outstanding 0.61% 0.36% 0.12% 0.14% 0.30%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1997, the Corporation had a ratio of
average tier 1 capital to average assets of 10.73%. This
compares to a ratio of average tier 1 capital to average assets
of 10.36% at December 31, 1996, and 10.08% at December 31, 1995.
Cash dividends declared in 1997 were 11.2% more than those paid
in 1996. The dividend to net income ratio was 22%. Additional
dividends of approximately $15.9 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, 1997, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 18.7% and 19.7% respectively. At
December 31, 1996, the comparable ratios were 17.7% and 18.7%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital.
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>
1991 $30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS COPROATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 4.2% in 1997 enhanced by loan
growth in all the market areas the Bank serves. Interest and
fees earned on loans increased 5.5% in 1997 accounting for 74.6%
of gross interest income. Interest earned on investment
securities and other investments increased .7% in 1997 rounding
out gross interest income contributing 25.4%. Total interest
income increased 7.5% in 1996 and 11.9% in 1995.
Interest Expense
Total interest expense increased 3.6% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares
favorably to a 8.4% increase in 1996, about half of which can be
attributed to the acquisition, and a 19.9% increase in 1995.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. This
contributed to the strong gross margin achieved during 1997.
The net interest margin (tax equivalent net interest income
divided by average earning assets) was 4.7% at the end of 1997
and 1996 and 4.8% at the end of 1995.
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 19.6% during 1997 led by fees on
deposits. 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. This compares to a 28.4% increase
in 1996 and a 14.9% increase in 1995.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1997 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 $1,471 21.2%
Other service fees 845 12.2%
Securities gains 488 7.0%
Fees on deposits 3,744 53.9%
Other 394 5.7%
</TABLE>
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1997 which compares favorably with the
5.8% increase in 1996. The increase in 1995 was 6.2%.
Increased productivity fostered by our technology improvements
as the learning curve diminished and cost control efforts
contributed to this cost containment. Included in this category
is net occupancy expense for an additional office opened in 1997
and furniture and equipment, which includes technology expenses,
that was down over 5% from 1996.
A pie chart is included at this point in the materials sent to
out stockholders illustrating the composition of noninterest
expense in 1997 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 $7,319 45.6%
Furniture and equipment 1,501 9.3%
Occupancy 1,317 8.2%
Other 5,927 36.9%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,841,420 $ 27,343,817 $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment
securities
Taxable interest 6,802,934 6,892,118 6,179,492 7,012,626 6,925,404
Exempt from federal
income tax 2,488,475 2,366,764 2,156,813 2,184,666 1,857,168
Dividends 260,759 256,951 177,790 204,948 72,054
9,552,168 9,515,833 8,514,095 9,402,240 8,854,626
Other interest
income 253,497 223,019 121,492 284,384 347,287
TOTAL INTEREST
INCOME 38,647,085 37,082,669 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 17,218,537 16,617,525 15,247,875 12,770,618 11,998,235
Interest on other short
term borrowings 85,853 94,232 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 17,304,390 16,711,757 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 21,342,695 20,370,912 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES 1,940,000 1,300,000 670,000 660,000 470,000
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 19,402,695 19,070,912 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,470,568 1,323,525 1,251,642 1,249,359 863,952
Service fees on deposit
accounts 3,744,381 3,373,805 2,697,332 2,317,992 2,206,026
Other service fees,
commissions, and fees 845,072 745,523 300,407 336,758 509,009
Other operating income 394,322 363,430 322,634 319,466 315,108
Securities gains (losses) 487,972 - 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 6,942,315 5,806,283 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee
benefits 7,319,460 7,030,588 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,316,588 1,211,067 1,279,434 1,190,678 1,070,971
Furniture and equipment
expense 1,500,486 1,580,753 1,382,769 1,069,856 889,848
Deposit insurance 57,004 6,549 499,709 890,646 826,966
Other operating expenses 5,869,844 5,292,103 4,557,307 4,109,461 4,180,105
TOTAL NONINTEREST
EXPENSES 16,063,382 15,121,060 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,281,628 9,756,135 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES 3,227,676 2,889,339 2,518,769 2,203,746 2,220,965
NET INCOME $ 7,053,952 $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE
(1,400,000 outstanding
shares) $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
</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 2.7% higher in 1997 than in 1996. As indicated
earlier, the improvement in 1997's earnings resulted from a
strong gross margin reinforced by loans increasing as a
percentage of earning assets, an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses,
and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan
losses associated with a corrected loan underwriting problem.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have been adopted by the Corporation as follows:
(1) Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" requires a reconciliation of the
numerators and the denominators of the basic and diluted
per-share computation for income from continuing operations.
The statement is effective prospectively for earnings per share
computation for both interim and annual periods ending after
December 31, 1997. Because the Corporation has no potential
common stock outstanding, it is required to present only basic
earnings per share and its presentation of earnings per share
did not change. (2) Statement of Financial Accounting Standards
No. 129 (SFAS 129), "Disclosure of Information about Capital Structure"
requires an entity to explain, in summary form within its
financial statements, the pertinent rights and privileges of the
various securities outstanding. The Corporation only has one
class of common stock outstanding and this statement had no
material effect on the financial statements.
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Corporation as
follows: (1) Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income" purposes that
an entity report a measure of all changes in equity that result
from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as
owners. The statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe this
statement will have any material effect on future financial
statements except for disclosures. (2) Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information" establishes
guidelines for reporting financial information about an
operating segment or component of an enterprise. The statement
is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any
material effect on future financial statements except for
disclosures.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force has been established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, or are in the process of
being obtained, from our software and hardware vendors,
confirming their Year 2000 compatibility; and plans are in place
for testing our systems' compatibility before June 30, 1998.
Management believes that our information systems are well on
their way to being Year 2000 compliant.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1997, had a
market value of $109 million and were held by 1,618 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 tables below show 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.
These tables were shown graphically in the materials sent to our
stockholders.
<TABLE>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <C> <C> <C> <C>
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
First quarter $ 67.00 $ 65.00 $
Second quarter 69.00 69.00 0.53
1997 Third quarter 72.00 70.00
Fourth quarter 78.00 72.00 0.56
$ 1.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE DATA
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 527,926 $ 502,700 $ 463,739 $ 451,953 $ 420,760
AVERAGE LOANS (NET) $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,609
AVERAGE DEPOSITS $ 463,576 $ 443,902 $ 409,489 $ 404,412 $ 378,782
RETURN ON EQUITY AND
ASSETS
Return on average
assets 1.34% 1.37% 1.32% 1.23% 1.25%
Return on beginning
equity 12.97% 14.01% 13.95% 14.11% 14.93%
Average tier 1
capital to average
assets 10.73% 10.36% 10.08% 9.25% 8.90%
COMMON DIVIDEND PAYOUT
RATIO
Earnings per shar $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
Cash dividends per
share $ 1.09 $ 0.98 $ 0.88 $ 0.80 $ 0.73
Ratio 22% 20% 20% 20% 19%
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 39,581 $ 37,986 $ 35,626 $ 32,039 $ 29,465
INTEREST EXPENSE 17,304 16,712 15,422 12,864 12,037
$ 22,277 $ 21,274 $ 20,204 $ 19,175 $ 17,428
NET INTEREST MARGIN* 4.65% 4.66% 4.79% 4.68% 4.58%
<FN>
<F3>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
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 a part of the Annual Report to
Stockholders which is included in this filing.
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 1997, 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. "High Technology + High Commitment =
High Performance" was the challenge for the year as the Bank
committed to provide quality services in diverse markets and a
dynamic interest rate environment. Our customers are enjoying
the quality service of a community bank and the safety and
strength of a regional bank.
The accompanying tables plus the discussion and financial
information are presented to aid in understanding First Farmers
and Merchants Corporation's current financial position and
results of operations. The emphasis of this discussion will be
on the years 1997, 1996, and 1995; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition
depends on the quality and nature of its assets, its liability
and capital structure, the market and economic conditions, and
the quality of its personnel. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
Summary
The Bank reported net income of $7.1 million for 1997 compared
to $6.9 million in 1996 and $6.1 million in 1995. On a per
common share basis, net income was $5.04 for 1997 versus $4.90
for 1996 and $4.37 for 1995. The improvement in 1997's earnings
resulted from a strong gross margin reinforced by loan demand
that changed the mix of earning assets as higher yielding loans
were funded with maturing investment securities and an increase in
noninterest income sufficient to cover a smaller increase in
noninterest expenses and most of the increase in taxes. These
improvements were partially offset by higher additions to the allowance
for loan losses.
The return on average equity for 1997 was 12.2% compared to
13.2% for 1996 and 13.1% for 1995. The return on average
assets was 1.34% for 1997 versus 1.37% for 1996 and 1.32% for
1995.
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>
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
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 $ 314,198 9.18 % $ 28,858 * $ 290,413 9.43 % $ 27,373 * $ 276,166 9.38 % $ 25,892 *
Bank time deposits 1 - - 1 - - 2 - -
Taxable securities 113,013 6.35 7,173 118,114 6.14 7,256 104,217 6.20 6,457
Tax exempt securities 47,366 6.96 3,297 * 44,158 7.10 3,134 * 39,105 8.07 3,156 *
Federal funds sold 4,631 5.46 253 4,198 5.31 223 2,076 5.83 121
TOTAL EARNING ASSETS 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986 421,566 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 27,039 25,760 24,829
Bank premises and equipment 6,633 6,708 6,246
Other assets 15,045 13,348 11,098
TOTAL ASSETS $ 527,926 $ 502,700 $ 463,739
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 166,828 3.38 % $ 5,634 $ 158,438 3.39 % $ 5,338 $ 148,993 3.51 % $ 5,223
Savings 43,776 3.37 1,476 37,428 3.22 1,204 34,627 3.00 1,040
Time 152,389 5.29 8,063 151,973 5.40 8,210 136,605 5.30 7,245
Time over $100,000 37,680 5.43 2,045 34,554 5.40 1,866 32,522 5.35 1,740
TOTAL INTEREST BEARING
DEPOSITS 400,673 4.30 17,218 382,393 4.35 16,618 352,747 4.32 15,248
Federal funds purchased 1,016 5.80 59 1,043 5.56 58 2,415 5.92 143
Other short-term debt 538 5.02 27 622 5.79 36 565 5.49 31
TOTAL INTEREST BEARING
LIABILITIES 402,227 4.30 $17,304 384,058 4.35 $16,712 355,727 4.34 $15,422
Noninterest bearing liabilities
Demand deposits 62,903 61,509 56,742
Other liabilities 4,990 5,066 4,515
TOTAL LIABILITIES 470,120 450,633 416,984
Stockholders' equity 57,806 52,067 46,755
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 527,926 $ 502,700 $ 463,739
Spread between combined
rates earned and combined
rates paid* 3.96 % 3.96 % 4.12 %
Net yield on interest-earning
assets* 4.65 % 4.66 % 4.79 %
<FN>
<F1>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
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 amortized cost of
available-for-sale securities were used in the calculations in
this table.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<CAPTION>
1997 Compared 1996 1996 Compared 1995
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S>
Revenue earned on <C> <C> <C> <C> <C> <C>
Net loans $ 2,243 $ (758) $ 1,485 $ 1,336 $ 145 $ 1,481
Investment securities
Taxable securities (314) 231 (83) 861 (62) 799
Tax-free securities 228 (65) 163 408 (430) (22)
Federal funds sold 23 7 30 124 (22) 102
Total interest earning
assets 2,180 (585) 1,595 2,729 (369) 2,360
Interest paid on
NOW and money market
accounts 283 13 296 331 (216) 115
Savings deposits 204 68 272 84 80 164
Time deposits 23 (170) (147) 815 150 965
Time over $100,000 169 10 179 109 17 126
Federal funds purchased (2) 3 1 (81) (4) (85)
Short term debt (5) (4) (9) 3 2 5
Total interest-bearing
funds 672 (80) 592 1,261 29 1,290
Net interest earnings 1,508 $ (505) $ 1,003 $ 1,468 $ (398) $ 1,070
</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, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
investment securities. Bank qualified 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 stockholders. The first graph illustrates in thousands of
dollars, the categories of average earning assets and the
portion each category is of the total for the last three years.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Investment
Loans Securities Other
<S> <C> <C> <C>
1997 $314,198 $160,722 $4,613
1996 290,413 162,188 4,199
1995 276,166 143,358 2,078
</TABLE>
Average earning assets increased 5.0% in 1997 compared to an
8.4% increase in 1996 and a 3.0% increase in 1995. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1997, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 8.2% growth
from 1996 to 1997, a 5.2% growth from 1995 to 1996, and an 11.5%
growth from 1994 to 1995. Average investments accounted for the
remaining balance of average earning assets at December 31,
1997, decreasing .9% from year end 1996. Some of the proceeds
from maturities and calls of investment securities was used to
fund the expanding loan demand during the year. Average
investments increased 14.5% in 1996. The Bank purchased certain
assets and assumed certain deposit liabilities of two branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. Most of the increase in investments during 1996 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. Average total assets increased during
the last three years as evidenced by a 5.0% growth from 1996 to
1997, an 8.4% growth from 1995 to 1996, and a 2.6% growth from
1994 to 1995.
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 Noninterest_Bearing
Deposits Deposits Other
<S> <C> <C> <C>
1997 $390,077 $80,205 $ -
1996 382,393 61,509 1,043
1995 352,747 56,742 3,526
</TABLE>
The bank's average deposits grew during the last three years
reflecting a 4.4% growth from 1996 to 1997, an 8.4% growth from
1995 to 1996, and a 1.3% growth from 1994 to 1995. Short and
medium term rates remained competitive compared to longer term
rates during 1997 and some depositors left money in or moved
money back into interest-bearing transaction accounts, which
increased 5.3% during 1997 and 6.3% in 1996. However, over half
of the increase during 1996 was attributable to the acquisition.
Average interest-bearing checking accounts decreased 7.6 % in
1995 as investors took advantage of higher certificate of
deposit rates. Average savings deposits increased almost 17.0%
during 1997 and 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. Average certificates of deposit under
$100,000 increased .3% during 1997, 11.3% during 1996, 60.0%
from the acquisition, and 8.0% in 1995. Certificates of deposit
over $100,000 increased 9.1% in 1997 compared to 6.3% in 1996,
87.8% from the acquisition, and 24.8% in 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1997, 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, 1997, 1996, and 1995 was 4.65%, 4.66%, and 4.79% respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1997 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 12,800 $ - $ - $ - $ 12,800
Taxable investment
securities 3,928 7,989 5,000 80,574 97,491
Tax-exempt investment
securities 1,151 720 1,150 45,275 48,296
Loans and leases, net of
unearned 61,297 45,612 65,193 159,606 331,708
Total earning assets 79,176 54,321 71,343 285,455 490,295
Interest-bearing
liabilities
NOW and money market
accounts 48,546 - 66,832 40,656 156,034
Savings - - 44,170 - 44,170
Time 42,702 30,421 54,807 22,614 150,544
Time over $100,000 10,242 8,917 16,536 3,634 39,329
Other short-term debt 602 - - - 602
Total interest
bearing liabilities 102,092 39,338 182,345 66,904 $ 390,679
Noninterest-bearing, net (99,616)
Net asset/liability
funding gap (22,916) 14,983 (111,002) 118,935
Cumulative net asset/
liability funding gap $ (22,916) $ (7,933) $ (118,935) $ -
<FN>
<F2>
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 & 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, 1997.
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 $3.0 million at December
31, 1997, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent .9% of gross loans.
Commercial loans comprised $.6 million of the total, with loans
secured by real estate accounting for $1.4 million, and
installment loans $1.0 million. The gross interest income that
would have been recorded during 1997 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 $431, $374, and $365 thousand for
the years ended December 31, 1997, 1996, and 1995 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.
The bar graph on the bottom of this page shows the increase in
average net loans (in thousands of dollars) and the line shows
the ratio of net loan charge offs to average loans. The ratio
at December 31, 1997 was .61%. Management monitoring found and
corrected a problem in consumer loan underwriting that
contributed to the higher net charge off percentage in 1997.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1981 $ 54,908 .0027
1982 60,119 .0077
1983 66,964 .0039
1984 80,055 .0036
1985 98,353 .0044
1986 120,243 .0036
1987 142,959 .0077
1988 154,506 .0027
1989 163,003 .0032
1990 172,749 .0030
1991 182,561 .0037
1992 215,158 .0023
1993 233,608 .0030
1994 247,791 .0014
1995 276,166 .0012
1996 290,413 .0036
1997 314,198 .0061
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,608
Balance of allowance for
possible loan losses at
beginning of year $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Loans charged-off:
Loans secured by real
estate 88 368 15 135 396
Commercial and industrial
loans 605 141 170 42 222
Individuals 1,371 879 371 246 230
TOTAL LOANS CHARGED
OFF 2,064 1,388 556 423 848
Recoveries of loans
previously charged off:
Loans secured by real
estate 8 111 97 9 56
Commercial and industrial
loans 53 42 14 36 52
Individuals 80 183 111 36 40
TOTAL RECOVERIES 141 336 222 81 148
NET LOANS
CHARGED-O 1,923 1,052 334 342 700
Provision charged to
operating expenses 1,940 1,300 670 660 470
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Ratio of net charge-offs
during the period to average
loans outstanding 0.61% 0.36% 0.12% 0.14% 0.30%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1997, the Corporation had a ratio of
average tier 1 capital to average assets of 10.73%. This
compares to a ratio of average tier 1 capital to average assets
of 10.36% at December 31, 1996, and 10.08% at December 31, 1995.
Cash dividends declared in 1997 were 11.2% more than those paid
in 1996. The dividend to net income ratio was 22%. Additional
dividends of approximately $15.9 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, 1997, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 18.7% and 19.7% respectively. At
December 31, 1996, the comparable ratios were 17.7% and 18.7%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital.
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>
1991 $30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS COPROATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 4.2% in 1997 enhanced by loan
growth in all the market areas the Bank serves. Interest and
fees earned on loans increased 5.5% in 1997 accounting for 74.6%
of gross interest income. Interest earned on investment
securities and other investments increased .7% in 1997 rounding
out gross interest income contributing 25.4%. Total interest
income increased 7.5% in 1996 and 11.9% in 1995.
Interest Expense
Total interest expense increased 3.6% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares
favorably to a 8.4% increase in 1996, about half of which can be
attributed to the acquisition, and a 19.9% increase in 1995.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. This
contributed to the strong gross margin achieved during 1997.
The net interest margin (tax equivalent net interest income
divided by average earning assets) was 4.7% at the end of 1997
and 1996 and 4.8% at the end of 1995.
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 19.6% during 1997 led by fees on
deposits. 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. This compares to a 28.4% increase
in 1996 and a 14.9% increase in 1995.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1997 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 $1,471 21.2%
Other service fees 845 12.2%
Securities gains 488 7.0%
Fees on deposits 3,744 53.9%
Other 394 5.7%
</TABLE>
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1997 which compares favorably with the
5.8% increase in 1996. The increase in 1995 was 6.2%.
Increased productivity fostered by our technology improvements
as the learning curve diminished and cost control efforts
contributed to this cost containment. Included in this category
is net occupancy expense for an additional office opened in 1997
and furniture and equipment, which includes technology expenses,
that was down over 5% from 1996.
A pie chart is included at this point in the materials sent to
out stockholders illustrating the composition of noninterest
expense in 1997 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 $7,319 45.6%
Furniture and equipment 1,501 9.3%
Occupancy 1,317 8.2%
Other 5,927 36.9%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,841,420 $ 27,343,817 $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment
securities
Taxable interest 6,802,934 6,892,118 6,179,492 7,012,626 6,925,404
Exempt from federal
income tax 2,488,475 2,366,764 2,156,813 2,184,666 1,857,168
Dividends 260,759 256,951 177,790 204,948 72,054
9,552,168 9,515,833 8,514,095 9,402,240 8,854,626
Other interest
income 253,497 223,019 121,492 284,384 347,287
TOTAL INTEREST
INCOME 38,647,085 37,082,669 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 17,218,537 16,617,525 15,247,875 12,770,618 11,998,235
Interest on other short
term borrowings 85,853 94,232 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 17,304,390 16,711,757 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 21,342,695 20,370,912 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES 1,940,000 1,300,000 670,000 660,000 470,000
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 19,402,695 19,070,912 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,470,568 1,323,525 1,251,642 1,249,359 863,952
Service fees on deposit
accounts 3,744,381 3,373,805 2,697,332 2,317,992 2,206,026
Other service fees,
commissions, and fees 845,072 745,523 300,407 336,758 509,009
Other operating income 394,322 363,430 322,634 319,466 315,108
Securities gains (losses) 487,972 - 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 6,942,315 5,806,283 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee
benefits 7,319,460 7,030,588 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,316,588 1,211,067 1,279,434 1,190,678 1,070,971
Furniture and equipment
expense 1,500,486 1,580,753 1,382,769 1,069,856 889,848
Deposit insurance 57,004 6,549 499,709 890,646 826,966
Other operating expenses 5,869,844 5,292,103 4,557,307 4,109,461 4,180,105
TOTAL NONINTEREST
EXPENSES 16,063,382 15,121,060 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,281,628 9,756,135 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES 3,227,676 2,889,339 2,518,769 2,203,746 2,220,965
NET INCOME $ 7,053,952 $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE
(1,400,000 outstanding
shares) $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
</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 2.7% higher in 1997 than in 1996. As indicated
earlier, the improvement in 1997's earnings resulted from a
strong gross margin reinforced by loans increasing as a
percentage of earning assets, an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses,
and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan
losses associated with a corrected loan underwriting problem.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have been adopted by the Corporation as follows:
(1) Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" requires a reconciliation of the
numerators and the denominators of the basic and diluted
per-share computation for income from continuing operations.
The statement is effective prospectively for earnings per share
computation for both interim and annual periods ending after
December 31, 1997. Because the Corporation has no potential
common stock outstanding, it is required to present only basic
earnings per share and its presentation of earnings per share
did not change. (2) Statement of Financial Accounting Standards
No. 129 (SFAS 129), "Disclosure of Information about Capital Structure"
requires an entity to explain, in summary form within its
financial statements, the pertinent rights and privileges of the
various securities outstanding. The Corporation only has one
class of common stock outstanding and this statement had no
material effect on the financial statements.
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Corporation as
follows: (1) Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income" purposes that
an entity report a measure of all changes in equity that result
from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as
owners. The statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe this
statement will have any material effect on future financial
statements except for disclosures. (2) Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information" establishes
guidelines for reporting financial information about an
operating segment or component of an enterprise. The statement
is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any
material effect on future financial statements except for
disclosures.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force has been established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, or are in the process of
being obtained, from our software and hardware vendors,
confirming their Year 2000 compatibility; and plans are in place
for testing our systems' compatibility before June 30, 1998.
Management believes that our information systems are well on
their way to being Year 2000 compliant.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1997, had a
market value of $109 million and were held by 1,618 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 tables below show 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.
These tables were shown graphically in the materials sent to our
stockholders.
<TABLE>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <C> <C> <C> <C>
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
First quarter $ 67.00 $ 65.00 $
Second quarter 69.00 69.00 0.53
1997 Third quarter 72.00 70.00
Fourth quarter 78.00 72.00 0.56
$ 1.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE DATA
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 527,926 $ 502,700 $ 463,739 $ 451,953 $ 420,760
AVERAGE LOANS (NET) $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,609
AVERAGE DEPOSITS $ 463,576 $ 443,902 $ 409,489 $ 404,412 $ 378,782
RETURN ON EQUITY AND
ASSETS
Return on average
assets 1.34% 1.37% 1.32% 1.23% 1.25%
Return on beginning
equity 12.97% 14.01% 13.95% 14.11% 14.93%
Average tier 1
capital to average
assets 10.73% 10.36% 10.08% 9.25% 8.90%
COMMON DIVIDEND PAYOUT
RATIO
Earnings per shar $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
Cash dividends per
share $ 1.09 $ 0.98 $ 0.88 $ 0.80 $ 0.73
Ratio 22% 20% 20% 20% 19%
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 39,581 $ 37,986 $ 35,626 $ 32,039 $ 29,465
INTEREST EXPENSE 17,304 16,712 15,422 12,864 12,037
$ 22,277 $ 21,274 $ 20,204 $ 19,175 $ 17,428
NET INTEREST MARGIN* 4.65% 4.66% 4.79% 4.68% 4.58%
<FN>
<F3>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
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 a part of the Annual Report to Stockholders
which is included in this filing.
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, 1997, 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 fifteen (15) 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 and Crockett 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. At December 31, 1997, approximately $8.9
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
Securities
Investments are classified in three categories and accounted
for as follows:
Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Debt and equity securities that are bought and held
principally for the purpose of selling them in
<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)
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 deferred
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 payoff generally are
stated at their outstanding unpaid principal balances net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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.
When a loan is collateral dependent, impairment is measured
based on the observable market price or the fair value of the
collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Interest on loans is accrued 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 nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment. Interest income on loans in
nonaccrual status is recognized only to the extent of the excess
of cash payments received over principal payments due.
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 $410 thousand at December 31, 1997, and $450
thousand at December 31, 1996.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through
provisions for loan losses charged against income. Loan quality
is monitored by Loan Review and
<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)
the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and
subsequent recoveries, if any, are credited to the allowance
account in the period such determination is made. The adequacy
of the allowance for possible loan losses is evaluated quarterly
in conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1997 - $182,613; 1996 - $224,212; and 1995 - $168,020.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement
No. 128, "Earnings per Share". which supersedes APB Opinion No.
15. This statement requires the presentation of earnings per
share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Because the
Corporation has no potential common stock outstanding, it is
required to present only basic earnings per share and its
presentation of earnings per share will not change. Earnings
per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each
period presented.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $116,315,234 and
$103,540,673 at December 31, 1997 and 1996, respectively (fair
value: 1997 - $117,969,544; 1996 - $104,061,311), 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, 1997, 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
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337,240 $ 233,853 $ 14,893 $ 22,556,200
U.S. Government agencies 23,834,686 53,172 92,413 23,795,445
Other securities 2,749,094 422,591 2,000 3,169,685
$ 48,921,020 $ 709,616 $ 109,306 $ 49,521,330
Held-to-maturity securities
U.S. Treasury $ 10,432,892 $ 209,508 $ - $ 10,642,400
U.S. Government agencies 36,552,480 657,930 2,048 37,208,362
States and political
subdivisions 48,465,174 1,218,108 12,144 49,671,138
Other securities 815,421 33,735 - 849,156
$ 96,265,967 $ 2,119,281 $ 14,192 $ 98,371,056
December 31, 1996
Available-for-sale securities
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
<FN>
<F1>
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, 1997, 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, 1997, 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 $11,008,435, $3,020,054, and
$7,306,453 during 1997, 1996, and 1995, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$32,386,811, $56,112,000, and $18,848,992 during 1997, 1996, and
1995, respectively. Gross gains of $489,697 and gross losses of
$1,725 were realized on dispositions in 1997. There were no
realized gains or losses in 1996. Gross gains of $1,182 and
gross losses of $-0- were realized on the dispositions in 1995.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 8,051,787 $ 8,049,800 5.5%
After one but within five years 14,285,453 14,506,400 6.2%
U.S. Government agencies
Within one year 3,994,953 3,999,700 6.1%
After one but within five years 19,585,333 19,541,020 5.8%
After ten years 254,400 254,725 6.1%
Other securities 2,749,094 3,169,685 9.0%
$ 48,921,020 $ 49,521,330
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,432,892 $ 10,642,400 6.4%
U.S. Government agencies
Within one year 2,999,150 2,997,100 5.4%
After one but within five years 18,669,684 19,008,962 6.6%
After five but within ten years 14,883,646 15,202,300 6.5%
States and political subdivisions
Within one year 3,239,829 3,286,218 9.3%
After one but within five years 13,595,854 13,865,175 7.7%
After five but within ten years 18,510,918 18,983,557 7.4%
After ten years 13,118,573 13,536,188 7.8%
Other securities
After one but within five years 315,421 323,206 8.0%
After five but within ten years 500,000 525,950 7.3%
$ 96,265,967 $ 98,371,056
<FN>
<F2>
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>
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 60,592,529 $ 54,565,335
Tax exempt municipal loans 768,125 605,933
Real estate
Construction 5,861,866 8,751,021
Commercial mortgages 52,968,199 46,114,930
Residential mortgages 146,768,418 125,854,753
Other 5,869,654 7,115,749
Consumer loans 58,879,231 60,993,583
331,708,022 304,001,304
Less:
Net unamortized loan origination fees (347,839) (269,260)
Allowance for possible loan losses (2,943,000) (2,926,063)
$ 328,417,183 $ 300,805,981
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1997
and 1996
</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 $ 78,350 $ 47,052 $ 40,499 $ 165,901
Variable rate loans 93,752 30,484 41,571 165,807
$ 172,102 $ 77,536 $ 82,070 $ 331,708
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1997
</FN>
</TABLE>
Loans having recorded investments of $2,954,000 at December
31, 1997, have been identified as impaired. The total allowance
for possible loan losses related to these loans was $1,146,000.
Interest received on these loans during 1997 was $479,698.
Impaired loans had recorded investments of approximately
$5,136,000 at December 31, 1996.
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, 1997 and 1996, 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 1997 or 1996.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
<S> <C> <C> <C> <C>
1997
Aggregate of certain party loans $ 8,222,262 $ 12,488,090 $ 8,276,031 $ 12,434,321
1996
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 2,926,063 $ 2,678,386 $ 2,342,290
Provision charged to operating expenses 1,940,000 1,300,000 670,000
Loan losses:
Loans charged off (2,064,138) (1,388,422) (555,957)
Recoveries on loans previously
charged off 141,075 336,099 222,053
Balance at end of year $ 2,943,000 $ 2,926,063 $ 2,678,386
<FN>
<F6>
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, 1997.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 1,348,288 $ 1,348,288
Premises 7,027,521 7,013,942
Furniture and equipment 3,857,459 4,068,373
Leasehold improvements 1,209,113 1,149,732
13,442,381 13,580,335
Less allowance for depreciation and
amortization (7,029,016) (6,750,860)
$ 6,413,365 $ 6,829,475
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1997 and 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank
premises and equipment total $651,619 for 1997, $685,005 for
1996, and $645,816 for 1995. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling approximately $2,670,000 at
December 31, 1997.
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, 1997, additional dividends of approximately $15,900,000
could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for five of the Bank's office locations and
certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $689,887,
$726,337, and $660,121 for equipment leases, and $112,070,
$112,384, and $111,649 for building leases, in 1997, 1996, and
1995, respectively. Future minimum lease commitments as of
December 31, 1997, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<C> <C>
1998 $ 513,083
1999 121,128
2000 124,128
2001 124,128
2002 86,328
Thereafter 94,200
Total future minimum lease payments $ 1,062,995
<FN>
<F8>
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>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 2,416,401 $ 2,422,550 $ 2,166,566
State 557,218 628,788 585,606
Total current 2,973,619 3,051,338 2,752,172
Deferred:
Federal 215,949 (137,700) (198,393)
State 38,108 (24,299) (35,010)
Total deferred 254,057 (161,999) (233,403)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
<FN>
<F8>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance for possible loan losses $ 776,888 $ 914,386 $ 815,315
Write-down of other real estate - 177,120 177,120
Deferred compensation 403,857 336,255 256,139
Deferred loan fees 19,823 26,863 44,051
Deferred tax asset 1,200,568 1,454,624 1,292,625
Unrealized gain on AFS securities (240,124) (97,294) (157,392)
Deferred tax liability (240,124) ( 97,294) (157,392)
Net deferred tax asset $ 960,444 $ 1,357,330 $ 1,135,233
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,495,754 $ 3,317,086 $ 2,935,722
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (896,112) (859,383) (783,011)
Nondeductible interest expense 106,329 101,534 89,491
Employee benefits (55,560) (34,685) (22,418)
Other nondeductible expenses
(nontaxable income) - net 11,146 13,515 (5,695)
State income taxes, net of
federal tax benefit 392,915 398,963 363,393
Dividend income exclusion (33,239) (34,855) (18,324)
Other 55,891 (12,836) (40,388)
Total provision for income taxes $ 3,227,676 $ 2,889,339 $ 2,518,769
Effective tax rate 31.4% 29.6% 29.2%
<FN>
<F11>
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 1997, 1996, and 1995 amounted to
$2,927,000, $3,140,000 and $2,756,442, respectively.
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters of
credit in the normal course of business at December 31, 1997,
were $21,735,000 and $1,977,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1997,
1996, and 1995 amounted to $17,049,703, $17,206,708, and
$14,845,107, 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, 1997 and 1996,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios exceeded
the minimum standard for a "well capitalized" bank as of
September 30, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<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, 1997 Amount Ratio Amount Ratio > or= Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 61,732,093 19.68% 25,098,756 8.00% 31,373,445 10.00%
Bank 61,153,956 19.54% 25,040,651 8.00% 31,300,813 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789,093 18.74% 12,549,378 4.00% 18,824,067 6.00%
Bank 58,210,956 18.60% 12,520,325 4.00% 18,780,488 6.00%
Tier I Capital (Average)
(to Average Assets)
Consolidated 56,515,935 10.73% 21,073,801 4.00% 26,342,251 5.00%
Bank 55,946,149 10.63% 21,047,205 4.00% 26,309,006 5.00%
As of December 31, 1996
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% 11,988,374 4.00% 17,982,562 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% 20,102,944 4.00% 25,128,680 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
</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 nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<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 $684,227, $661,307 and $633,459, in 1997, 1996, and
1995, 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 (1997 - $645,985; 1996 - $620,657) purchased
in 1993 to fund the plan and the related liability (1997 -
$501,255; 1996 - $513,792) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $25,328 in 1997 and $26,436 in 1996 is
included in the above asset values. Net noncash income was
$14,133 in 1995. 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 $42,463 in
1997, $64,024 in 1996, and $106,066 in 1995.
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, net of benefits paid out in 1997
and accruals, of $173,841 for 1997, $172,871 for 1996, and
$176,727 for 1995 have been recognized in the accompanying
consolidated financial statements. In connection with this
plan, a single premium universal life insurance policy was
purchased on the life of each director who elected to
participate. Additional single premium universal life insurance
policies, totaling $385,000, were purchased in 1997 for new
participants. Net noncash income recognized on these policies
of $103,953 in 1997 and $85,249 in 1996 is included in the cash
surrender values of $2,376,124 and $1,887,171 reported in other
assets at December 31, 1997 and 1996, respectively. Net noncash
income was $51,803 in 1995.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1997 -
$819,460; 1996 - $785,330) is included in other assets, and net
noncash income recognized on this policy of $34,130 in 1997 and
net expense of $9,670 in 1996 is included in the above asset
values.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replacement/split dollar plan. These
policies have an aggregate face amount of $3,163,750.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31,1997 December 31,1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks $ 29,873 $ 29,873 $ 27,917 $ 27,917
Federal funds sold 12,800 12,800 - -
Securities held to maturity 96,266 98,371 118,542 119,226
Securities available for
sale 48,921 49,521 55,898 56,142
Loans, net 328,417 325,323 300,806 309,401
Accrued interest receivable 5,366 5,366 5,549 5,549
Financial liabilities
Deposits 470,282 456,557 460,573 449,129
Federal funds purchased - - 5,000 5,000
Short term borrowings 602 602 523 523
Accrued interest payable 2,794 2,794 2,539 2,539
<FN>
<F13>
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, 1997, 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
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362,178 $ 9,705,584 $ 9,774,855 $ 9,804,468 $ 38,647,085
Interest expense 4,258,739 4,330,171 4,361,715 4,353,765 17,304,390
Net interest income 5,103,439 5,375,413 5,413,140 5,450,703 21,342,695
Provision for possible loan
losses 450,000 290,000 550,000 650,000 1,940,000
Noninterest expenses, net
of noninterest income 2,394,981 2,405,847 2,388,160 1,932,079 9,121,067
Income before income taxes 2,258,458 2,679,566 2,474,980 2,868,624 10,281,628
Income taxes 556,134 795,731 917,613 958,198 3,227,676
Net income $ 1,702,324 $ 1,883,835 $ 1,557,367 $ 1,910,426 $ 7,053,952
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.35 $ 1.11 $ 1.36 $ 5.04
First Secon Third Fourth
Quarter Quarter Quarter Quarter Total
1996
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
<FN>
<F14>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its sixteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
<S> <C> <S><C> <S><C> <S><C>
Demand deposits $ 62,909 - % $ 61,509 - % $ 56,730 - %
NOW and money market accounts 166,914 3.37 158,450 3.37 149,016 3.51
Savings deposits 43,775 3.37 37,421 3.22 34,629 3.00
Time deposits of less than
$100,000 152,389 5.29 151,952 5.40 136,568 5.30
Time deposits of $100,000 or
more 37,686 5.42 34,539 5.41 32,524 5.35
Total In Domestic Offices $463,673 3.71% $443,870 3.74% $409,467 3.72%
<FN>
<F15>
Table XV - Average Amounts of Deposits and Average Rates Paid
by Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 9,308 $ 11,680 $ 7,877
3 to 12 months 25,981 22,638 18,407
Over 12 months 4,039 4,812 4,310
$ 39,328 $ 39,130 $ 30,594
<FN>
<F16>
Table XVI - Maturities of Time Deposits of $100,000 or More at
December 31
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 72 $ 142
Investment in bank subsidiary - at equity 59,565 53,870
Investment in credit life insurance company
- at cost 50 50
Investment in other securities 25 22
Dividends receivable from bank subsidiary 784 714
Cash surrender value - life insurance 651 489
Other assets - 1
Total assets $ 61,147 $ 55,288
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 220 $ 173
Dividends payable 784 714
Total liabilities 1,004 887
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 45,783 40,255
Net unrealized gain (loss) on
available-for-sale securities, net of
tax 360 146
Total stockholders' equity 60,143 54,401
Total liabilities and stockholders' equity $ 61,147 $ 55,288
<FN>
<F17>
Table XVII - Condensed Statements of Balance Sheet of Parent
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Dividends from bank subsidiary $ 1,526 $ 1,372
Other dividend income 80 85
Interest income 8 6
Other 34 28
Operating expenses 76 68
Income before equity in undistributed net
income of bank subsidiary 1,572 1,423
Equity in undistributed net income of bank
subsidiary 5,482 5,444
Net Income $ 7,054 $ 6,867
<FN>
<F18>
Table XVIII - Condensed Statements of Income 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>
Condensed Statements of Cash Flows
Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<CAPTION>
1997 1996
<S> <C> <C>
Operating activities
Net income for the year $ 7,054 $ 6,867
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed net income
of bank subsidiary (5,482) (5,444)
Increase in other assets (98) (111)
Increase in payables 47 44
Total adjustments (5,533) (5,511)
Net cash provided by operating
activities 1,521 1,356
Net cash provided by (used in)
investing activities
Purchases of investment securities (119) (133)
Proceeds from maturities of
investment securities 119 137
Purchase of single premium life
insurance policy (135) -
Net cash provided by (used in)
investing activities (135) 4
Net cash used in financing activities
Cash dividends paid (1,456) (1,288)
Increase (decrease) in cash (70) 72
Cash at beginning of year 142 70
Cash at end of year $ 72 $ 142
<FN>
<F19>
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 1997, 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. "High Technology + High Commitment =
High Performance" was the challenge for the year as the Bank
committed to provide quality services in diverse markets and a
dynamic interest rate environment. Our customers are enjoying
the quality service of a community bank and the safety and
strength of a regional bank.
The accompanying tables plus the discussion and financial
information are presented to aid in understanding First Farmers
and Merchants Corporation's current financial position and
results of operations. The emphasis of this discussion will be
on the years 1997, 1996, and 1995; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition
depends on the quality and nature of its assets, its liability
and capital structure, the market and economic conditions, and
the quality of its personnel. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
Summary
The Bank reported net income of $7.1 million for 1997 compared
to $6.9 million in 1996 and $6.1 million in 1995. On a per
common share basis, net income was $5.04 for 1997 versus $4.90
for 1996 and $4.37 for 1995. The improvement in 1997's earnings
resulted from a strong gross margin reinforced by loan demand
that changed the mix of earning assets as higher yielding loans
were funded with maturing investment securities and an increase in
noninterest income sufficient to cover a smaller increase in
noninterest expenses and most of the increase in taxes. These
improvements were partially offset by higher additions to the allowance
for loan losses.
The return on average equity for 1997 was 12.2% compared to
13.2% for 1996 and 13.1% for 1995. The return on average
assets was 1.34% for 1997 versus 1.37% for 1996 and 1.32% for
1995.
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>
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
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 $ 314,198 9.18 % $ 28,858 * $ 290,413 9.43 % $ 27,373 * $ 276,166 9.38 % $ 25,892 *
Bank time deposits 1 - - 1 - - 2 - -
Taxable securities 113,013 6.35 7,173 118,114 6.14 7,256 104,217 6.20 6,457
Tax exempt securities 47,366 6.96 3,297 * 44,158 7.10 3,134 * 39,105 8.07 3,156 *
Federal funds sold 4,631 5.46 253 4,198 5.31 223 2,076 5.83 121
TOTAL EARNING ASSETS 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986 421,566 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 27,039 25,760 24,829
Bank premises and equipment 6,633 6,708 6,246
Other assets 15,045 13,348 11,098
TOTAL ASSETS $ 527,926 $ 502,700 $ 463,739
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 166,828 3.38 % $ 5,634 $ 158,438 3.39 % $ 5,338 $ 148,993 3.51 % $ 5,223
Savings 43,776 3.37 1,476 37,428 3.22 1,204 34,627 3.00 1,040
Time 152,389 5.29 8,063 151,973 5.40 8,210 136,605 5.30 7,245
Time over $100,000 37,680 5.43 2,045 34,554 5.40 1,866 32,522 5.35 1,740
TOTAL INTEREST BEARING
DEPOSITS 400,673 4.30 17,218 382,393 4.35 16,618 352,747 4.32 15,248
Federal funds purchased 1,016 5.80 59 1,043 5.56 58 2,415 5.92 143
Other short-term debt 538 5.02 27 622 5.79 36 565 5.49 31
TOTAL INTEREST BEARING
LIABILITIES 402,227 4.30 $17,304 384,058 4.35 $16,712 355,727 4.34 $15,422
Noninterest bearing liabilities
Demand deposits 62,903 61,509 56,742
Other liabilities 4,990 5,066 4,515
TOTAL LIABILITIES 470,120 450,633 416,984
Stockholders' equity 57,806 52,067 46,755
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 527,926 $ 502,700 $ 463,739
Spread between combined
rates earned and combined
rates paid* 3.96 % 3.96 % 4.12 %
Net yield on interest-earning
assets* 4.65 % 4.66 % 4.79 %
<FN>
<F1>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
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 amortized cost of
available-for-sale securities were used in the calculations in
this table.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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>
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<CAPTION>
1997 Compared 1996 1996 Compared 1995
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S>
Revenue earned on <C> <C> <C> <C> <C> <C>
Net loans $ 2,243 $ (758) $ 1,485 $ 1,336 $ 145 $ 1,481
Investment securities
Taxable securities (314) 231 (83) 861 (62) 799
Tax-free securities 228 (65) 163 408 (430) (22)
Federal funds sold 23 7 30 124 (22) 102
Total interest earning
assets 2,180 (585) 1,595 2,729 (369) 2,360
Interest paid on
NOW and money market
accounts 283 13 296 331 (216) 115
Savings deposits 204 68 272 84 80 164
Time deposits 23 (170) (147) 815 150 965
Time over $100,000 169 10 179 109 17 126
Federal funds purchased (2) 3 1 (81) (4) (85)
Short term debt (5) (4) (9) 3 2 5
Total interest-bearing
funds 672 (80) 592 1,261 29 1,290
Net interest earnings 1,508 $ (505) $ 1,003 $ 1,468 $ (398) $ 1,070
</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, taxable municipal, and
corporate debt securities plus equity securities in the
available-for-sale and held-to-maturity categories are taxable
investment securities. Bank qualified 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 stockholders. The first graph illustrates in thousands of
dollars, the categories of average earning assets and the
portion each category is of the total for the last three years.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Investment
Loans Securities Other
<S> <C> <C> <C>
1997 $314,198 $160,722 $4,613
1996 290,413 162,188 4,199
1995 276,166 143,358 2,078
</TABLE>
Average earning assets increased 5.0% in 1997 compared to an
8.4% increase in 1996 and a 3.0% increase in 1995. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1997, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 8.2% growth
from 1996 to 1997, a 5.2% growth from 1995 to 1996, and an 11.5%
growth from 1994 to 1995. Average investments accounted for the
remaining balance of average earning assets at December 31,
1997, decreasing .9% from year end 1996. Some of the proceeds
from maturities and calls of investment securities was used to
fund the expanding loan demand during the year. Average
investments increased 14.5% in 1996. The Bank purchased certain
assets and assumed certain deposit liabilities of two branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. Most of the increase in investments during 1996 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. Average total assets increased during
the last three years as evidenced by a 5.0% growth from 1996 to
1997, an 8.4% growth from 1995 to 1996, and a 2.6% growth from
1994 to 1995.
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 Noninterest_Bearing
Deposits Deposits Other
<S> <C> <C> <C>
1997 $390,077 $80,205 $ -
1996 382,393 61,509 1,043
1995 352,747 56,742 3,526
</TABLE>
The bank's average deposits grew during the last three years
reflecting a 4.4% growth from 1996 to 1997, an 8.4% growth from
1995 to 1996, and a 1.3% growth from 1994 to 1995. Short and
medium term rates remained competitive compared to longer term
rates during 1997 and some depositors left money in or moved
money back into interest-bearing transaction accounts, which
increased 5.3% during 1997 and 6.3% in 1996. However, over half
of the increase during 1996 was attributable to the acquisition.
Average interest-bearing checking accounts decreased 7.6 % in
1995 as investors took advantage of higher certificate of
deposit rates. Average savings deposits increased almost 17.0%
during 1997 and 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. Average certificates of deposit under
$100,000 increased .3% during 1997, 11.3% during 1996, 60.0%
from the acquisition, and 8.0% in 1995. Certificates of deposit
over $100,000 increased 9.1% in 1997 compared to 6.3% in 1996,
87.8% from the acquisition, and 24.8% in 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1997, 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, 1997, 1996, and 1995 was 4.65%, 4.66%, and 4.79% respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1997 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 12,800 $ - $ - $ - $ 12,800
Taxable investment
securities 3,928 7,989 5,000 80,574 97,491
Tax-exempt investment
securities 1,151 720 1,150 45,275 48,296
Loans and leases, net of
unearned 61,297 45,612 65,193 159,606 331,708
Total earning assets 79,176 54,321 71,343 285,455 490,295
Interest-bearing
liabilities
NOW and money market
accounts 48,546 - 66,832 40,656 156,034
Savings - - 44,170 - 44,170
Time 42,702 30,421 54,807 22,614 150,544
Time over $100,000 10,242 8,917 16,536 3,634 39,329
Other short-term debt 602 - - - 602
Total interest
bearing liabilities 102,092 39,338 182,345 66,904 $ 390,679
Noninterest-bearing, net (99,616)
Net asset/liability
funding gap (22,916) 14,983 (111,002) 118,935
Cumulative net asset/
liability funding gap $ (22,916) $ (7,933) $ (118,935) $ -
<FN>
<F2>
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 & 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, 1997.
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 $3.0 million at December
31, 1997, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent .9% of gross loans.
Commercial loans comprised $.6 million of the total, with loans
secured by real estate accounting for $1.4 million, and
installment loans $1.0 million. The gross interest income that
would have been recorded during 1997 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 $431, $374, and $365 thousand for
the years ended December 31, 1997, 1996, and 1995 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.
The bar graph on the bottom of this page shows the increase in
average net loans (in thousands of dollars) and the line shows
the ratio of net loan charge offs to average loans. The ratio
at December 31, 1997 was .61%. Management monitoring found and
corrected a problem in consumer loan underwriting that
contributed to the higher net charge off percentage in 1997.
The following table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1981 $ 54,908 .0027
1982 60,119 .0077
1983 66,964 .0039
1984 80,055 .0036
1985 98,353 .0044
1986 120,243 .0036
1987 142,959 .0077
1988 154,506 .0027
1989 163,003 .0032
1990 172,749 .0030
1991 182,561 .0037
1992 215,158 .0023
1993 233,608 .0030
1994 247,791 .0014
1995 276,166 .0012
1996 290,413 .0036
1997 314,198 .0061
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,608
Balance of allowance for
possible loan losses at
beginning of year $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Loans charged-off:
Loans secured by real
estate 88 368 15 135 396
Commercial and industrial
loans 605 141 170 42 222
Individuals 1,371 879 371 246 230
TOTAL LOANS CHARGED
OFF 2,064 1,388 556 423 848
Recoveries of loans
previously charged off:
Loans secured by real
estate 8 111 97 9 56
Commercial and industrial
loans 53 42 14 36 52
Individuals 80 183 111 36 40
TOTAL RECOVERIES 141 336 222 81 148
NET LOANS
CHARGED-O 1,923 1,052 334 342 700
Provision charged to
operating expenses 1,940 1,300 670 660 470
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Ratio of net charge-offs
during the period to average
loans outstanding 0.61% 0.36% 0.12% 0.14% 0.30%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1997, the Corporation had a ratio of
average tier 1 capital to average assets of 10.73%. This
compares to a ratio of average tier 1 capital to average assets
of 10.36% at December 31, 1996, and 10.08% at December 31, 1995.
Cash dividends declared in 1997 were 11.2% more than those paid
in 1996. The dividend to net income ratio was 22%. Additional
dividends of approximately $15.9 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, 1997, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 18.7% and 19.7% respectively. At
December 31, 1996, the comparable ratios were 17.7% and 18.7%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital.
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>
1991 $30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS COPROATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 4.2% in 1997 enhanced by loan
growth in all the market areas the Bank serves. Interest and
fees earned on loans increased 5.5% in 1997 accounting for 74.6%
of gross interest income. Interest earned on investment
securities and other investments increased .7% in 1997 rounding
out gross interest income contributing 25.4%. Total interest
income increased 7.5% in 1996 and 11.9% in 1995.
Interest Expense
Total interest expense increased 3.6% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares
favorably to a 8.4% increase in 1996, about half of which can be
attributed to the acquisition, and a 19.9% increase in 1995.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. This
contributed to the strong gross margin achieved during 1997.
The net interest margin (tax equivalent net interest income
divided by average earning assets) was 4.7% at the end of 1997
and 1996 and 4.8% at the end of 1995.
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 19.6% during 1997 led by fees on
deposits. 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. This compares to a 28.4% increase
in 1996 and a 14.9% increase in 1995.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1997 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 $1,471 21.2%
Other service fees 845 12.2%
Securities gains 488 7.0%
Fees on deposits 3,744 53.9%
Other 394 5.7%
</TABLE>
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1997 which compares favorably with the
5.8% increase in 1996. The increase in 1995 was 6.2%.
Increased productivity fostered by our technology improvements
as the learning curve diminished and cost control efforts
contributed to this cost containment. Included in this category
is net occupancy expense for an additional office opened in 1997
and furniture and equipment, which includes technology expenses,
that was down over 5% from 1996.
A pie chart is included at this point in the materials sent to
out stockholders illustrating the composition of noninterest
expense in 1997 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 $7,319 45.6%
Furniture and equipment 1,501 9.3%
Occupancy 1,317 8.2%
Other 5,927 36.9%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 28,841,420 $ 27,343,817 $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment
securities
Taxable interest 6,802,934 6,892,118 6,179,492 7,012,626 6,925,404
Exempt from federal
income tax 2,488,475 2,366,764 2,156,813 2,184,666 1,857,168
Dividends 260,759 256,951 177,790 204,948 72,054
9,552,168 9,515,833 8,514,095 9,402,240 8,854,626
Other interest
income 253,497 223,019 121,492 284,384 347,287
TOTAL INTEREST
INCOME 38,647,085 37,082,669 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 17,218,537 16,617,525 15,247,875 12,770,618 11,998,235
Interest on other short
term borrowings 85,853 94,232 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 17,304,390 16,711,757 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 21,342,695 20,370,912 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES 1,940,000 1,300,000 670,000 660,000 470,000
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 19,402,695 19,070,912 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,470,568 1,323,525 1,251,642 1,249,359 863,952
Service fees on deposit
accounts 3,744,381 3,373,805 2,697,332 2,317,992 2,206,026
Other service fees,
commissions, and fees 845,072 745,523 300,407 336,758 509,009
Other operating income 394,322 363,430 322,634 319,466 315,108
Securities gains (losses) 487,972 - 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 6,942,315 5,806,283 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee
benefits 7,319,460 7,030,588 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,316,588 1,211,067 1,279,434 1,190,678 1,070,971
Furniture and equipment
expense 1,500,486 1,580,753 1,382,769 1,069,856 889,848
Deposit insurance 57,004 6,549 499,709 890,646 826,966
Other operating expenses 5,869,844 5,292,103 4,557,307 4,109,461 4,180,105
TOTAL NONINTEREST
EXPENSES 16,063,382 15,121,060 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,281,628 9,756,135 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES 3,227,676 2,889,339 2,518,769 2,203,746 2,220,965
NET INCOME $ 7,053,952 $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE
(1,400,000 outstanding
shares) $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
</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 2.7% higher in 1997 than in 1996. As indicated
earlier, the improvement in 1997's earnings resulted from a
strong gross margin reinforced by loans increasing as a
percentage of earning assets, an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses,
and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan
losses associated with a corrected loan underwriting problem.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have been adopted by the Corporation as follows:
(1) Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" requires a reconciliation of the
numerators and the denominators of the basic and diluted
per-share computation for income from continuing operations.
The statement is effective prospectively for earnings per share
computation for both interim and annual periods ending after
December 31, 1997. Because the Corporation has no potential
common stock outstanding, it is required to present only basic
earnings per share and its presentation of earnings per share
did not change. (2) Statement of Financial Accounting Standards
No. 129 (SFAS 129), "Disclosure of Information about Capital Structure"
requires an entity to explain, in summary form within its
financial statements, the pertinent rights and privileges of the
various securities outstanding. The Corporation only has one
class of common stock outstanding and this statement had no
material effect on the financial statements.
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Corporation as
follows: (1) Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income" purposes that
an entity report a measure of all changes in equity that result
from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as
owners. The statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe this
statement will have any material effect on future financial
statements except for disclosures. (2) Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information" establishes
guidelines for reporting financial information about an
operating segment or component of an enterprise. The statement
is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any
material effect on future financial statements except for
disclosures.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force has been established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, or are in the process of
being obtained, from our software and hardware vendors,
confirming their Year 2000 compatibility; and plans are in place
for testing our systems' compatibility before June 30, 1998.
Management believes that our information systems are well on
their way to being Year 2000 compliant.
<PAGE>
FIRST FARMERS & MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1997, had a
market value of $109 million and were held by 1,618 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 tables below show 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.
These tables were shown graphically in the materials sent to our
stockholders.
<TABLE>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <C> <C> <C> <C>
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
First quarter $ 67.00 $ 65.00 $
Second quarter 69.00 69.00 0.53
1997 Third quarter 72.00 70.00
Fourth quarter 78.00 72.00 0.56
$ 1.09
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE DATA
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 527,926 $ 502,700 $ 463,739 $ 451,953 $ 420,760
AVERAGE LOANS (NET) $ 314,198 $ 290,413 $ 276,166 $ 247,791 $ 233,609
AVERAGE DEPOSITS $ 463,576 $ 443,902 $ 409,489 $ 404,412 $ 378,782
RETURN ON EQUITY AND
ASSETS
Return on average
assets 1.34% 1.37% 1.32% 1.23% 1.25%
Return on beginning
equity 12.97% 14.01% 13.95% 14.11% 14.93%
Average tier 1
capital to average
assets 10.73% 10.36% 10.08% 9.25% 8.90%
COMMON DIVIDEND PAYOUT
RATIO
Earnings per shar $ 5.04 $ 4.90 $ 4.37 $ 3.97 $ 3.75
Cash dividends per
share $ 1.09 $ 0.98 $ 0.88 $ 0.80 $ 0.73
Ratio 22% 20% 20% 20% 19%
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST MARGIN
(In Thousands of Dollars)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 39,581 $ 37,986 $ 35,626 $ 32,039 $ 29,465
INTEREST EXPENSE 17,304 16,712 15,422 12,864 12,037
$ 22,277 $ 21,274 $ 20,204 $ 19,175 $ 17,428
NET INTEREST MARGIN* 4.65% 4.66% 4.79% 4.68% 4.58%
<FN>
<F3>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
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 21, 1998.
<PAGE>
Executive Officers of Registrant
The following is a list as of March 6, 1998, showing the names
and ages of all executive officers of First Farmers and
Merchants Corporation ("FFMC"), the nature of any family
relationships between them, and all positions and offices with
the Corporation held by each of them:
Family Positions and
Name Age Relationship Offices Held
Waymon L. Hickman 63 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 46 None President and Chief
Operating Officer and
Director of the Bank.
Director and Vice
President of FFMC.
Employed in 1973.
Promoted to Commercial
Bank Officer in 1974.
Promoted to Assistant
Vice President in 1976.
Promoted to Vice
President in 1979.
Became Vice President and
Trust Officer in 1982.
Promoted to First Vice
President in 1984.
Promoted to Executive Vice
President and Chief
Administrative Officer in
1990. Elected as
Director of the Bank
in 1991 and Director and
Vice President of FFMC in
1991. Elected President
and Chief Operating
Officer of the Bank
effective December 31,
1995.
<PAGE>
Executive Officers of Registrant-Continued
Family Positions and
Name Age Relationship Offices Held
John P. Tomlinson, III 47 None Vice President/Secretary of
FFMC. 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 53 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.
Patricia N. McClanahan 53 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.
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.
<PAGE>
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 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.
<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.
<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
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 of the Bank)
Date March 17, 1998
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 17, 1998
/s / Patricia N. McClanahan
Patricia N. McClanahan, Treasurer
(Chief Financial Officer of the Bank)
Date March 17, 1998
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.
<PAGE>
Signatures -- continued
Signatures -- continued
/s/ Kenneth A. Abercrombie
Kenneth A. Abercrombie, Director
Date March 17, 1998
/s/ James L. Bailey, Jr.
James L. Bailey, Jr., Director
Date March 17, 1998
/s/ Flavius A. Barker
Flavius A. Barker, Director
Date March 17, 1998
/s/ Harlan D. Bowsher
Harlan D. Bowsher, Director
Date March 17, 1998
/s/ Hulet M. Chaney
Hulet M. Chaney, Director
Date March 17, 1998
/s/ H. Terry Cook, Jr.
H. Terry Cook, Jr. , Director
Date March 17, 1998
/s/ W. J. Davis, Jr.
W. J. Davis, Jr., Director
Date March 17, 1998
/s/ Thomas Napier Gordon
Thomas Napier Gordon, Director
Date March 17, 1998
/s/ Edwin W. Halliday
Edwin W. Halliday, Director
Date March 17, 1998
/s/ Waymon L. Hickman
Waymon L. Hickman, Director
Date March 17, 1998
/s/ Tillman Knox
Tillman Knox, Director
Date March 17, 1998
/s/ Joe E. Lancaster
Joe E. Lancaster, Director
Date March 17, 1998
/s/ T. Randy Stevens
T. Randy Stevens, Director
Date March 17, 1998
/s/ Dan C. Wheeler
Dan C. Wheeler, Director
Date March 17, 1998
/s/ David I. Wise
David I. Wise, Director
Date March 17, 1998
/s/ W. Donald Wright
W. Donald Wright, Director
Date March 17, 1998
<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, 1997
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
FORM 10-K -- ITEM 14(a)(1) and (2)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statements of First Farmers
and Merchants Corporation and Subsidiary, included in the annual
report of the registrant to its security holders for the year
ended December 31, 1997, are incorporated by reference in Item 8:
Consolidated balance sheets -- December 31, 1997 and 1996
Consolidated statements of income -- Years ended December 31,
1997, 1996, and 1995
Consolidated statements of cash flows -- Years ended December
31, 1997, 1996, and 1995
Notes to consolidated financial statements -- December 31, 1997
The following financial statement schedules of First Farmers and
Merchants Corporation and subsidiary are included in Item 14(d):
None
All other schedules to the consolidated financial statements
required by Article 9 of Regulation S-X and all other schedules
to the financial statements of the registrant required by
Article 5 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore, have been
omitted.
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
Exhibit Number Title or Description
(13) Annual Report to Stockholders
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FIRST FARMERS AND MERCHANTS CORPORATION
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,872,192
<INT-BEARING-DEPOSITS> 1,141
<FED-FUNDS-SOLD> 12,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,521,330
<INVESTMENTS-CARRYING> 96,265,967
<INVESTMENTS-MARKET> 98,371,056
<LOANS> 331,360,183
<ALLOWANCE> (2,943,000)
<TOTAL-ASSETS> 537,322,171
<DEPOSITS> 470,281,807
<SHORT-TERM> 602,100
<LIABILITIES-OTHER> 6,294,940
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 46,143,324
<TOTAL-LIABILITIES-AND-EQUITY> 537,322,171
<INTEREST-LOAN> 28,841,420
<INTEREST-INVEST> 9,522,168
<INTEREST-OTHER> 253,497
<INTEREST-TOTAL> 38,647,085
<INTEREST-DEPOSIT> 17,218,537
<INTEREST-EXPENSE> 17,304,390
<INTEREST-INCOME-NET> 21,342,695
<LOAN-LOSSES> 1,940,000
<SECURITIES-GAINS> 487,972
<EXPENSE-OTHER> 16,063,382
<INCOME-PRETAX> 10,281,628
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,053,952
<EPS-PRIMARY> 5.04
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.65
<LOANS-NON> 2,953,772
<LOANS-PAST> 18,460
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,926,063
<CHARGE-OFFS> 2,064,138
<RECOVERIES> 141,075
<ALLOWANCE-CLOSE> 2,943,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
