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, 1998
Commission file number 0-10972
First Farmers and Merchants Corporation
(Exact name of registrant as specified in its charter)
Tennessee 62-1148660
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
(Address of principal executive offices) (Zip Code)
(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 15, 1998. 2,920,000 shares
This filing contains 67 pages.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 1998 Annual Stockholders Meeting of
April 20, 1999. -- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31,
1998. -- Parts I and II
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The Bank conducts a full-service commercial banking
business through sixteen offices in its community service area
which is comprised of Maury, Lawrence, Marshall, Hickman, and
adjacent counties in southern middle Tennessee. Its principal
office is at 816 South Garden Street, Columbia, Maury County,
Tennessee. Other offices in Maury County are Mt. Pleasant,
Spring Hill, and additional offices in Columbia at High Street,
Hatcher Lane, Northside, Shady Brook Mall, and Campbell Plaza.
Offices in Lawrence County include Lawrenceburg, Crockett in
Lawrenceburg, Leoma, and Loretto. Offices in Marshall County
include Lewisburg, Lewisburg West, and Chapel Hill. Offices in
Hickman County include Centerville and an office in the eastern
part of the county to be built in 1999. The Bank will enter
Dickson County with an office in White Bluff in early 1999. The
Bank provides only automatic teller machine services in the
Northfield Complex at the Saturn location near Spring Hill, and
in Columbia at the Tennessee Farm Bureau, Columbia State
Community College, and Maury Regional Hospital.
Accounting Policies
The accounting principles followed and the methods of
applying those principles conform with generally accepted
accounting principles and to general practices in the banking
industry. The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present
the accounts of the Corporation and its wholly-owned subsidiary,
the Bank. Material intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock Split
During 1998, the Corporation amended its corporate charter
to increase the number of authorized shares of its common stock
from 4,000,000 to 8,000,000 shares and on April 21, 1998, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend to stockholders of record
on April 21, 1998. In accordance with State corporate legal
requirements, the transaction was recorded by a transfer from
retained earnings to common stock in the amount of $14,000,000
($10 for each additional share issued). All per share and share
data in the accompanying consolidated financial statements and
footnotes have been restated to give retroactive effect to the
transaction.
Cash and Due From Banks
Included in cash and due from banks are legally reserved
amounts which are required to be maintained on an average basis
in the form of cash and balances due from the Federal Reserve
Bank and other banks. At December 31, 1998, approximately $3.8
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from
banks, and federal funds sold. Federal funds are sold for
one-day periods.
Securities
Trading account investment securities that are bought
and held principally for the purpose of selling them in the near
term are carried at market value. Gains and losses, both
realized and unrealized, are included in other operating income.
There were no securities so classified in 1998 or 1997.
Investment securities that the Bank has the positive
intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost with premiums
and discounts recognized in interest income using the interest
method over the period to maturity.
Those securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
available-for-sale securities and reported at fair value, with
unrealized gains and losses, net of deferred tax, excluded from
earnings and reported in other comprehensive income. Gains and
losses realized on the sale of available-for-sale securities are
determined using the specific identification method.
Declines in the fair value of individual
available-for-sale and held-to-maturity securities below their
cost that are other than temporary are included in earnings as
realized losses.
Loans
The Bank grants mortgage, commercial, and consumer loans
to customers. Loans that management has the intent and ability
to hold for the foreseeable future or until maturity or payoff
generally are stated at their outstanding unpaid principal
balances net of any deferred fees or costs on originated loans,
or unamortized premiums or discounts on purchased loans.
Interest on loans is accrued daily. Loan origination
fees and related direct costs are deferred and recognized as an
adjustment of yield on the interest method. Interest accruals
are discontinued when loans are ninety days past-due or when a
loan is considered impaired. Interest income previously accrued
on such loans is reversed against current period interest
income. Interest income on loans in nonaccrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established
through provisions for loan losses charged against income. Loan
quality is monitored by Loan Review and the Credit
Administrator. Portions of loans deemed to be uncollectible are
charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance account in the
period such determination is made. The adequacy of the
allowance for possible loan losses is evaluated quarterly in
conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
A loan is considered impaired when it is probable that
the Bank will be unable to collect all amounts due (principal
and interest) according to the contractual terms of the loan
agreement. All loans in nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment.
When a loan is collateral dependent, impairment is
measured based on the observable market price or the fair value
of the collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Other Real Estate
Other real estate, which is included in other assets,
represents real estate acquired through foreclosure and is
stated at the lower of fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate (Continued)
foreclosure, or the property is already carried at its estimated
net realizable value, any subsequent holding costs are expensed.
Legal fees and any other direct costs relating to foreclosures
are charged to operations when incurred.
The Bank's recorded value for other real estate was
approximately $544,000 at December 31, 1998, and $410,000 at
December 31, 1997.
Premises and Equipment
Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for
depreciation is computed principally on an accelerated cost
recovery method over the estimated useful lives of the assets,
which range as follows: buildings - 15 to 50 years and
equipment - 3 to 33 years. Costs of major additions and
improvements are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains or losses
from the disposition of property are reflected in operations,
and the asset accounts and related allowances for depreciation
are reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual
basis in the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax
return. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger
transactions are amortized over 42 to 180 months on the
straight-line method. Total amortization expense charged to
operations amounted to: 1998 - $78,000; 1997 - $183,000; and
1996 - $224,000.
Earnings Per Share
Basic earnings per share represents income available to
common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted earnings
per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed conversion. For the years ended December 31, 1998,
1997, and 1996, there were no potentially dilutive common shares
issuable.
Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income," as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet,
such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no
effect on the Corporation's net income or stockholders' equity.
Significant Group Concentrations of Credit Risk
Most of the Bank's activities are with customers located
within southern middle Tennessee. Note 2 discusses the types of
securities in which the Bank invests. Note 3 discusses the types
of lending in which the Bank engages. The Bank does not have any
significant concentrations to any one industry or customer.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $63,155,000 and
$116,315,000 at December 31, 1998 and 1997, respectively (fair
value: 1998 - $65,057,000; 1997 - $117,970,000), were pledged to
secure deposits and for other purposes as required or permitted
by law. The decline in pledged securities is due to the Bank's
participation in a state wide collateral pool in the last
quarter of 1998. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1998, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale securities
U.S. Treasury $ 32,418 $ 510 $ - $ 32,928
U.S. Government agencies 48,136 336 69 48,403
Other securities 2,841 175 - 3,016
$ 83,395 $ 1,021 $ 69 $ 84,347
Held-to-maturity securities
U.S. Treasury $ 10,322 $ 411 $ - $ 10,733
U.S. Government agencies 47,303 1,353 6 48,650
States and political
subdivisions 55,182 1,533 20 56,695
Other securities 1,841 91 - 1,932
$ 114,648 $ 3,388 $ 26 $ 118,010
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337 $ 234 $ 15 $ 22,556
U.S. Government agencies 23,835 53 92 23,796
Other securities 2,749 422 2 3,169
$ 48,921 $ 709 $ 109 $ 49,521
Held-to-maturity securities
U.S. Treasury $ 10,433 $ 209 $ - $ 10,642
U.S. Government agencies 36,553 658 2 37,209
States and political
subdivisions 48,465 1,218 12 49,671
Other securities 815 34 - 849
$ 96,266 $ 2,119 $ 14 $ 98,371
<FN>
<F1>
Table I - Amortized Cost and Fair Value of Investment Securities
Dollars in Thousands
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1998, the Corporation did not hold
investment securities of any single issuer, other than
obligations of the U.S. Treasury and other U.S. Government
agencies, whose aggregate book value exceeded ten percent of
stockholders' equity.
Table II shows the amortized cost, fair value, and
weighted yields (for tax-exempt obligations on a fully taxable
basis assuming a 34% tax rate) of investment securities at
December 31, 1998, by contractual maturity. Expected maturities
may differ from contractual maturities because issuers may have
the right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $18,009,000, $11,008,000, and
$3,020,000 during 1998, 1997, and 1996, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$11,101,000, $32,387,000, and $56,112,000 during 1998, 1997, and
1996, respectively. Gross gains of $351,000 and gross losses of
$-0- were realized on the dispositions in 1998. Gross gains of
$490,000 and gross losses of $2,000 were realized on
dispositions in 1997. There were no realized gains or losses in
1996.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
<S> <C> <C> <C>
Available-for-sale securities
U.S. Treasury
Within one year $ 16,177 $ 16,275 5.6%
After one but within five years 16,241 16,653 6.1%
U.S. Government agencies
Within one year 7,057 7,075 5.7%
After one but within five years 37,818 38,047 5.5%
After five but within ten years 3,015 3,033 5.3%
After ten years 246 248 6.1%
Other securities 2,841 3,016 9.3%
$ 83,395 $ 84,347
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,322 $ 10,733 6.4%
U.S. Government agencies
Within one year 5,499 5,531 6.8%
After one but within five years 27,500 28,178 6.3%
After five but within ten years 14,304 14,941 6.3%
States and political subdivisions
Within one year 3,044 3,062 7.4%
After one but within five years 14,028 14,348 7.3%
After five but within ten years 19,262 19,917 7.4%
After ten years 18,848 19,368 7.4%
Other securities
After one but within five years 311 314 8.0%
After five but within ten years 1,530 1,618 6.5%
$ 114,648 $ 118,010
<FN>
<F2>
Table II - Contractual Maturity of Investment Securities and Weighted
Tax Equivalent Yields
Dollars in Thousands
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
1998 1997
<S> <C> <C>
Commercial, financial and agricultural $ 42,422 $ 60,593
Tax exempt municipal loans 752 768
Real estate
Construction 6,848 5,862
Commercial mortgages 58,351 52,968
Residential mortgages 150,197 146,768
Other 7,071 5,870
Consumer loans 54,867 58,879
320,508 331,708
Less:
Net unamortized loan origination fees (324) (348)
Allowance for possible loan losses (3,852) (2,943)
$ 316,332 $ 328,417
<FN>
<F3>
Table III - Loans Outstanding by Category at December 31, 1998 and 1997
Dollars in Thousands
</FN>
</TABLE>
<TABLE>
<CAPTION>
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 75,334 $ 43,244 $ 50,206 $ 168,784
Variable rate loans 62,774 36,751 52,199 151,724
$ 138,108 $ 79,995 $ 102,405 $ 320,508
<FN>
<F4>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1998
Dollars in Thousands
</FN>
</TABLE>
Loans having recorded investments of $3,856,000 at
December 31, 1998, have been identified as impaired. The total
allowance for possible loan losses related to these loans was
$425,000. Interest received on these loans during 1998 was
$261,000. Impaired loans had recorded investments of
approximately $2,954,000 at December 31, 1997.
Certain parties (principally directors and senior
officers of the Corporation or the Bank, including their
affiliates, families, and companies in which they hold ten
percent or more ownership) were customers of, and had loans and
other transactions with, the Bank in the ordinary course of
business. Certain businesses that had previously been
considered related parties because of ownership interest no
longer meet those criteria. An analysis of activity with
respect to such loans for the years ended December 31, 1998 and
1997, is shown in Table V that follows.
These totals exclude loans made in the ordinary course
of business to other companies with which neither the
Corporation nor the Bank has a relationship other than the
association of one of its directors in the capacity of officer
or director. These loan transactions were made on substantially
the same terms as those prevailing at the time for comparable
loans to other persons. They did not involve more than the
normal risk of collectiblity or present other unfavorable
features. No related party loans were charged off in 1998 or
1997.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Amount End
of Year Additions Collected of Year
1998
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 12,434 $ 3,796 $ 12,639 $ 3,591
1997
Aggregate of certain party loans $ 8,222 $ 12,488 $ 8,276 $ 12,434
<FN>
<F5>
Table V - Analysis of Activity in Certain Party Loans
Dollars in Thousands
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 2,943 $ 2,926 $ 2,678
Provision charged to operating expenses 3,300 1,940 1,300
Loan losses:
Loans charged off (2,574) (2,064) (1,388)
Recoveries on loans previously
charged off 183 141 336
Balance at end of year $ 3,852 $ 2,943 $ 2,926
<FN>
<F6>
Table VI - Changes in the Allowance for Possible Loan Losses
Dollars in Thousands
</FN>
</TABLE>
In the opinion of management, based on conditions
reasonably known, the allowance was adequate at December 31,
1998. However, the allowance may be increased or decreased
based on loan growth, changes in credit quality, and changes in
general economic conditions.
For federal income tax purposes, the allowance for
possible loan losses is maintained at the maximum allowable by
the Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 1,348 $ 1,348
Premises 7,098 7,028
Furniture and equipment 5,247 3,857
Leasehold improvements 1,161 1,209
14,854 13,442
Less allowance for depreciation and amortization (7,614) (7,029)
$ 7,240 $ 6,413
<FN>
<F7>
Table VII - Premises and Equipment at December 31, 1998 and 1997
Dollars in Thousands
</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 $691,000 for 1998, $652,000
for 1997, and $685,000 for 1996. Included in premises and
equipment cost and allowance for depreciation and amortization
are certain fully depreciated assets totaling approximately
$2,495,000 at December 31, 1998.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
The approval of the Comptroller of the Currency is
required before the Bank's dividends in a given year may exceed
the total of its net profit (as defined) for the year combined
with retained net profits of the preceding two years. As of
December 31, 1998, additional dividends of approximately $13.8
million could have been declared by the Bank to the Corporation
without regulatory agency approval.
NOTE 7 - LEASES
Real property for four of the Bank's office locations
and certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $580,000,
$690,000, and $726,000 for equipment leases, and $129,000,
$112,000, and $112,000 for building leases, in 1998, 1997, and
1996, respectively. Future minimum lease commitments as of
December 31, 1998, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<CAPTION>
Lease
Year Payments
<C> <C>
1999 $ 148
2000 151
2001 151
2002 130
2003 131
Thereafter 133
Total $ 844
<FN>
<F8>
Table VIII - Future Minimum Lease Commitments
Dollars in Thousands
</FN>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 2,882 $ 2,417 $ 2,422
State 695 557 629
Total current 3,577 2,974 3,051
Deferred:
Federal (402) 216 (138)
State (63) 38 (24)
Total deferred (465) 254 (162)
Total provision for income taxes $ 3,112 $ 3,228 $ 2,889
<FN>
<F9>
Table IX - Provisions for Income Taxes
Dollars in Thousands
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Allowance for possible loan losses $ 1,214 $ 776 $ 914
Write-down of other real estate - - 177
Deferred compensation 485 404 336
Deferred loan fees 12 20 27
Deferred tax asset 1,711 1,200 1,454
Unrealized gain on AFS securities (362) (240) (97)
Other (45) - -
Deferred tax liability (407) (240) (97)
Net deferred tax asset $ 1,304 $ 960 $ 1,357
<FN>
<F10>
Table X - Deferred Tax Effects of Principal Temporary Differences
Dollars in Thousands
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,554 $ 3,496 $ 3,317
Increase (decrease) in taxes resulting from:
Tax-exempt interest (939) (896) (859)
Nondeductible interest expense 111 106 101
Employee benefits (41) (56) (35)
Other real estate 151
Other nondeductible expenses
(nontaxable income) - net 13 11 14
State income taxes, net of federal
tax benefit 418 393 399
Dividend income exclusion (42) (33) (35)
Other 38 56 (13)
Total provision for income taxes $ 3,112 $ 3,228 $ 2,889
Effective tax rate 29.8% 31.4% 29.6%
<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)
Dollars in Thousands
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The net deferred tax asset was included in other assets
in the accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The total outstanding loan commitments and standby letters
of credit in the normal course of business at December 31, 1998,
were approximately $28 million and $2 million, respectively.
Loan commitments are agreements to lend to a customer as long as
there is not a violation of any condition established in the
contract. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
making a loan.
The loan portfolio is well diversified with loans
generally secured by tangible personal property, real property,
or stock. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
Collateral requirements for the loan portfolio are based on
credit evaluation of the customer. It is management's opinion
that there is not a concentration of credit risk in the
portfolio.
NOTE 10 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal
regulatory risk-adjusted capital adequacy standards. Failure to
meet capital adequacy requirements can initiate certain
mandatory, and possibly additional discretionary, actions by
regulators that could have a direct material effect on the
consolidated financial statements of the Corporation and its
subsidiary. The regulations require the Bank to meet specific
capital adequacy guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to
ensure capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1998 and 1997,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
The Bank's calculated risk-adjusted capital ratios
exceeded the minimum standard for a "well capitalized" bank as
of December 31, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1998 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated $ 65,495 20.88% $ 25,096 8.00% $ - -
Bank 64,835 20.72% 25,036 8.00% 31,295 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 61,644 19.65% 12,548 4.00% - -
Bank 60,983 19.49% 12,518 4.00% 18,777 6.00%
Tier I Capital (to Average Assets)
Consolidated 61,644 11.19% 22,041 4.00% - -
Bank 60,983 11.08% 22,011 4.00% 27,514 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted
Assets) Consolidated 61,732 19.68% 25,099 8.00% - -
Bank 61,154 19.54% 25,041 8.00% 31,301 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789 18.74% 12,549 4.00% - -
Bank 58,211 18.60% 12,520 4.00% 18,780 6.00%
Tier I Capital (to Average Assets)
Consolidated 58,789 11.17% 21,074 4.00% - -
Bank 58,211 11.07% 21,047 4.00% 26,309 5.00%
<FN>
<F12>
Table XII - Capital Amounts and Capital Adequacy Ratios
Dollars in Thousands
</FN>
</TABLE>
NOTE 11 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
On October 26, 1998, the Bank entered into an agreement
and plan to merge the Farmers and Merchants Bank of White Bluff,
Dickson County, Tennessee, with and into the Bank. The Office
of the Comptroller of the Currency granted approval of this
merger as did appropriate state regulatory authorities. The
purchase of the $21 million dollar bank for 120,000 shares of
Corporation common stock was completed February 5, 1999.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Bank contributes to a defined contribution,
profit-sharing plan covering employees who meet participation
requirements. The amount of the contribution is discretionary
as determined by the Board of Directors up to the maximum
deduction allowed for federal income tax purposes.
Contributions to the plan, that amounted to $721,000, $684,000,
and $661,000, in 1998, 1997, and 1996, respectively, are
included in salaries and employee benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1998 - $672,000; 1997 - $646,000) purchased
in 1993 to fund the plan and the related liability (1998 -
$512,000; 1997 - $501,000) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $26,000 in 1998 and $25,000 in 1997 is
included in the above asset values. Net noncash income was
$26,000 in 1996. The principal cost of the plan is being
accrued over the anticipated remaining period of active
employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $66,000 in
1998, $42,000 in 1997, and $64,000 in 1996.
The Bank also implemented a deferred compensation
plan which permitted directors, beginning in 1993, to defer
their director's fees and earn interest on the deferred amount.
Liability increases for current deferred fees, net of benefits
paid out, of $208,000 for 1998, $174,000 for 1997, and $173,000
for 1996 have been recognized in the accompanying consolidated
financial statements. In connection with this plan, a single
premium universal life insurance policy was purchased on the
life of each director who elected to participate. Additional
single premium universal life insurance policies, totaling
$385,000, were purchased in 1997 for new participants. Net
noncash income recognized on these policies of $109,000 in 1998
and $103,000 in 1997 is included in the cash surrender values of
$2,485,000 and $2,376,000 reported in other assets at December
31, 1998 and 1997, respectively. Net noncash income was $85,000
in 1996.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1998 -
$804,000; 1997 - $820,000) is included in other assets, and net
expense recognized on this policy of $16,000 in 1998 and net
noncash income of $34,000 in 1997 are included in the above
asset values.
The Bank is beneficiary on the insurance policies
that fund the salary continuation plan, the deferred
compensation plan, and the group term replacement/split dollar
plan. These policies have an aggregate current death benefit of
$8.1 million.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 21,155 $ 21,155 $ 29,873 $ 29,873
Federal funds sold 12,000 12,000 12,800 12,800
Securities held to maturity 114,648 118,010 96,266 98,371
Securities available for sale 84,347 84,347 49,521 49,521
Loans, net 316,332 325,719 328,417 325,323
Accrued interest receivable 5,850 5,850 5,366 5,366
Financial liabilities
Deposits 500,531 487,536 470,282 456,557
Short term borrowings 602 602 602 602
Accrued interest payable 2,619 2,619 2,794 2,794
<FN>
<F13>
Table XIII - Summary of Fair Values of Financial Instruments
Dollars in Thousands
</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 amount of other short term borrowings is
considered to approximate its fair value.
The Bank's remaining assets and liabilities which are
not considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1998, the Bank had outstanding standby
letters of credit and commitments to extend credit. These
off-balance-sheet financial instruments are generally
exercisable at the market rate prevailing at the date the
underlying transaction will be completed and, therefore, are
deemed to have no current fair value. Please refer to Note 9.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1998
<S> <C> <C> <C> <C> <C>
Interest income $ 9,576 $ 10,139 $ 10,273 $ 10,065 $ 40,053
Interest expense 4,271 4,370 4,517 4,286 17,444
Net interest income 5,305 5,769 5,756 5,779 22,609
Provision for possible loan
losses 950 570 675 1,105 3,300
Noninterest expenses, net of
noninterest income 1,939 2,408 2,387 2,122 8,856
Income before income taxes 2,416 2,791 2,694 2,552 10,453
Income taxes 678 842 829 763 3,112
Net income $ 1,738 $ 1,949 $ 1,865 $ 1,789 $ 7,341
Earnings per common share
(2,800,000 shares)* $ 0.62 $ 0.69 $ 0.67 $ 0.64 $ 2.62
<FN>
<F14>
* These are restated First Quarter, 1998, numbers to give retroactive effect to
the 100% stock dividend paid to shareholders of record on April 21, 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1997
<S> <C> <C> <C> <C> <C>
Interest income $ 9,362 $ 9,706 $ 9,775 $ 9,804 $ 38,647
Interest expense 4,259 4,330 4,362 4,353 17,304
Net interest income 5,103 5,376 5,413 5,451 21,343
Provision for possible loan
losses 450 290 550 650 1,940
Noninterest expenses, net of
noninterest income 2,395 2,406 2,388 1,932 9,121
Income before income taxes 2,258 2,680 2,475 2,869 10,282
Income taxes 558 796 918 956 3,228
Net income $ 1,700 $ 1,884 $ 1,557 $ 1,913 $ 7,054
Earnings per common share
(2,800,000 shares)* $ 0.61 $ 0.67 $ 0.56 $ 0.68 $ 2.52
<FN>
<F15>
* These are restated 1997 numbers to give retroactiveeffect to the 100%
stock dividend paid to shareholders of record on April 21, 1998.
<F16>
Table XIV - Consolidated Quarterly Results of Operations
Dollars in Thousands Except Per Share Data
</FN/
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DEPOSITS
The Bank does not have any foreign offices and all
deposits are serviced in its sixteen domestic offices. The
average amounts of deposits and the average rates paid are
summarized in Table XV. Maturities of time deposits of
$100,000 or more at December 31 are indicated in Table XVI.
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 66,474 - % $ 62,903 - % $ 61,509 - %
NOW and money market accounts 175,956 3.19 166,828 3.38 158,438 3.39
Savings deposits 48,063 3.22 43,776 3.37 37,428 3.22
Time deposits of less than $100,000 151,006 5.28 152,389 5.29 151,973 5.40
Time deposits of $100,000 or more 41,870 5.46 37,680 5.43 34,554 5.40
Total In Domestic Offices $ 483,369 3.60% $ 463,576 3.71% $ 443,902 3.74%
<FN>
<F17>
Table XV - Average Amounts of Deposits and Average Rates Paid by Deposit Type at December 31
Dollars in Thousands
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Under 3 months $ 13,659 $ 9,308 $ 11,680
3 to 12 months 23,896 25,981 22,638
Over 12 months 5,056 4,039 4,812
$ 42,611 $ 39,328 $ 39,130
<FN>
<F18>
Table XVI - Maturities of Time Deposits of $100,000 or More at December 31
Dollars in Thousands
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
Condensed Balance Sheets
December 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Cash $ 175 $ 72
Investment in bank subsidiary - at equity 62,490 59,565
Investment in credit life insurance company - at cost 50 50
Investment in other securities 25 25
Dividends receivable from bank subsidiary 896 784
Cash surrender value - life insurance 681 651
Total assets $ 64,317 $ 61,147
Liabilities
Payable to directors $ 271 $ 220
Dividends payable 896 784
Total liabilities 1,167 1,004
Stockholders' equity
Common stock - $10 par value, authorized 8,000,000
shares; 2,800,000 shares issued and outstanding - Note 1 28,000 14,000
Retained earnings 34,560 45,783
Accumulated other comprehensive income 590 360
Total stockholders' equity 63,150 60,143
Total liabilities and stockholders' equity $ 64,317 $ 61,147
<FN>
<F19>
Table XVII - Condensed Balance Sheets of Parent
Dollars in Thousands
</FN>
</TABLE>
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1998 and 1997
1998 1997
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 4,564 $ 1,526
Other dividend income 122 80
Interest income 4 8
Other 40 34
Operating expenses 84 76
Income before equity in undistributed net
income of bank subsidiary 4,646 1,572
Equity in undistributed net income of bank subsidiary 2,695 5,482
Net Income $ 7,341 $ 7,054
<FN>
<F20>
Table XVIII - Condensed Statements of Income of Parent
Dollars in Thousands
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<CAPTION>
1998 1997
Operating activities
<S> <C> <C>
Net income for the year $ 7,341 $ 7,054
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary (2,695) (5,482)
Increase in other assets (142) (98)
Increase in payables 51 47
Total adjustments (2,786) (5,533)
Net cash provided by operating activities 4,555 1,521
Net cash provided by (used in) investing activities
Purchases of investment securities - (119)
Proceeds from maturities of investment securities - 119
Purchase of single premium life insurance policy - (135)
Net cash provided by (used in) investing activities - (135)
Net cash used in financing activities
Cash dividends paid (4,452) (1,456)
Increase (decrease) in cash 103 (70)
Cash at beginning of year 72 142
Cash at end of year $ 175 $ 72
<FN>
<F21>
Table XIX - Condensed Statements of Cash Flows of Parent
Dollars in Thousands
</FN>
</TABLE>
a. The "ANNUAL_REPORT_S" module contains Notes to Consolidated
Financial Statements which are a part of the Annual
Report to Stockholders which is included in this filing.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
(Dollars in Thousands) 1998 1997
<S> <S> <C> <C>
ASSETS Cash and due from banks $ 21,155 $ 29,873
Federal funds sold 12,000 12,800
Securities
Available for sale (amortized
cost $83,395 and $48,921
respectively) 84,347 49,521
Held to maturity
(fair value $118,010 and
$98,371 respectively) 114,648 96,266
Total securities - Note 2 198,995 145,787
Loans, net of deferred fees
- Note 3 320,184 331,360
Allowance for possible loan
losses - Note 4 (3,852) (2,943)
Net loans 316,332 328,417
Bank premises and equipment,
at cost less allowance for
depreciation - Note 5 7,240 6,413
Other assets 14,689 14,031
TOTAL ASSETS $570,411 $537,322
LIABILITIES Deposits
Noninterest-bearing $ 83,165 $ 80,205
Interest-bearing (including
certificates of deposit over
$100,000: 1998 - $42,611;
1997 - $39,328) 417,366 390,077
Total deposits 500,531 470,282
Dividends payable 896 784
Other short term liabilities 602 602
Accounts payable and accrued
liabilities 5,232 5,511
TOTAL LIABILITIES 507,261 477,179
COMMITMENTS AND CONTINGENCIES
Notes 7 and 9
STOCKHOLDERS' Common stock - $10 par value,
EQUITY 8,000,000 shares authorized;
2,800,000 shares issued and
outstanding - Note 1 28,000 14,000
Retained earnings - Note 6 34,560 45,783
Accumulated other comprehensive
income 590 360
TOTAL STOCKHOLDERS' EQUITY 63,150 60,143
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $570,411 $537,322
<FN>
<F1>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands Except Per Share Data)
<CAPTION>
Years Ended December 31, 1998 1997 1996
<S> <S> <C> <C> <C>
INTEREST INCOME Interest and fees on loans $29,155 $28,841 $27,344
Income on investment securities
Taxable interest 7,326 6,803 6,892
Exempt from federal income tax 2,583 2,488 2,367
Dividends 300 261 257
10,209 9,552 9,516
Other interest income 689 254 223
TOTAL INTEREST INCOME 40,053 38,647 37,083
INTEREST EXPENSE Interest on deposits 17,414 17,218 16,618
Interest on other short term
borrowings 30 86 94
TOTAL INTEREST EXPENSE 17,444 17,304 16,712
NET INTEREST INCOME 22,609 21,343 20,371
PROVISION FOR POSSIBLE
LOAN LOSSES - Note 4 3,300 1,940 1,300
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,309 19,403 19,071
NONINTEREST INCOME Trust department income 1,516 1,471 1,324
Service fees on deposit accounts 3,669 3,744 3,374
Other service fees, commissions,
and fees 1,043 845 745
Other operating income 985 394 363
Securities gains (losses) 351 488 -
TOTAL NONINTEREST INCOME 7,564 6,942 5,806
NONINTEREST
EXPENSES Salaries and employee benefits 7,776 7,319 7,030
Net occupancy expense 1,356 1,317 1,211
Furniture and equipment expense 1,472 1,500 1,581
Other operating expenses 5,816 5,927 5,299
TOTAL NONINTEREST EXPENSES 16,420 16,063 15,121
INCOME BEFORE PROVISION FOR
INCOME TAXES 10,453 10,282 9,756
PROVISION FOR INCOME
TAXES - Note 8 3,112 3,228 2,889
NET INCOME $ 7,341 $ 7,054 $ 6,867
EARNINGS PER SHARE Common Stock - Note 1
(2,800,000 outstanding shares) $ 2.62 $ 2.52 $ 2.45
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Accumulated
(Dollars in Thousands) Other
Common Retained Comprehensive
Years Ended December 31, Stock Earnings Income Total
1998, 1997, and 1996
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $14,000 $34,760 $ 236 $48,996
Comprehensive income
Net income - 6,867 - 6,867
Change in net unrealized gain
(loss) on securities
available-for-sale, net of
reclassification adjustment
and tax effects - (90) (90)
Total comprehensive income 6,777
Cash dividends declared, $.49 per
share * - (1,372) - (1,372)
BALANCE AT DECEMBER 31, 1996 14,000 40,255 146 54,401
Comprehensive income
Net income - 7,054 - 7,054
Change in net unrealized gain
(loss) on securities
available-for-sale, net of
reclassification adjustment
and tax effects - 214 214
Total comprehensive income 7,268
Cash dividends declared, $.55 per
share* (1,526) - (1,526)
BALANCE AT DECEMBER 31, 1997 14,000 45,783 360 60,143
Comprehensive income
Net income - 7,341 - 7,341
Change in net unrealized gain
(loss) on securities
available-for-sale, net of
reclassification adjustment
and tax effects - 230 230
Total comprehensive income 7,571
Two-for-one stock split - Note 1 14,000 (14,000) - -
Cash dividends declared, $1.63
per share (4,564) - (4,564)
BALANCE AT DECEMBER 31, 1998 $28,000 $34,560 $ 590 $63,150
<FN>
<F3>
* Cash dividends per share amounts for 1997 and 1996 are
restated to give retroactive effect to the two-for-one stock
split as of 4-21-98.
<F4>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Dollars In Thousands)
Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C> <C>
OPERATING Net income $ 7,341 $ 7,054 $ 6,867
ACTIVITIES Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 909 17 248
Provision for depreciation and
amortization of premises and
equipment 691 652 685
Provision for depreciation of leased
equipment 501 834 522
Amortization of deposit base
intangibles 78 183 224
Amortization of investment security
premiums, net of accretion of
discounts 567 471 553
Increase in cash surrender value of
life insurance contracts (119) (164) (112)
Deferred income taxes (465) 254 (162)
(Increase) decrease in
Interest receivable (484) 183 (125)
Other assets (290) 15 308
Increase (decrease) in
Interest payable (174) 255 (495)
Other liabilities (105) 1,137 (62)
Total adjustments 1,109 3,837 1,584
Net cash provided by operating
activities 8,450 10,891 8,451
INVESTING Maturity and call proceeds of
ACTIVITIES investment securities
Available-for-sale 18,009 11,008 3,020
Held-to-maturity 11,101 32,387 56,112
Purchases of investment securities
Available-for-sale (52,898) (4,157) (48,222)
Held-to-maturity (29,635) (10,456) (47,365)
Net (increase) decrease in loans 11,176 (27,628) (11,802)
Purchases of premises and equipment (1,518) (236) (1,117)
Purchase of equipment leased - - (2,608)
Purchase of deposit base intangibles - - (1,124)
Purchase of single premium life
insurance contract - (385) (785)
Net cash provided (used) by
investing activities (43,765) 533 (53,891)
FINANCING Net increase in noninterest-bearing
ACTIVITIES and interest-bearing deposits 30,249 9,709 29,931
Assumption of deposit liabilities
- Note 12 - - 19,864
Net increase (decrease) in short
term borrowings - (4,921) (6,432)
Cash dividends (4,452) (1,456) (1,288)
Net cash provided by financing
activities 25,797 3,332 42,075
Increase (decrease) in cash and
cash equivalents (9,518) 14,756 (3,365)
Cash and cash equivalents at
beginning of year 42,673 27,917 31,282
Cash and cash equivalents at
end of year $33,155 $42,673 $27,917
Supplemental disclosures of cash
flow information
Cash paid during the period for
expenses
Interest $17,618 $17,050 $17,207
Income taxes 3,902 2,927 3,140
<FN>
<F5>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
b. The "STATEMENTS" module contains the Consolidated
Financial Statements which are a part of the Annual
Report to Stockholders which is included in this filing.
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting
principles.
/s/ Kraft Bros., Esstman, Patton, & Harrell, PLLC
Nashville, Tennessee
March 5, 1999
1200 Parkway Towers
404 James Robertson Parkway
Nashville, TN 37219-1598
(615) 242-7351 * FAX 256-1952
Also in Columbia and Lebanon, TN
<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, 1998. 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,
1998, the Corporation maintained an effective internal control
system over financial reporting presented in conformity with
generally accepted accounting principles.
Compliance With Laws and Regulations
Management is responsible for maintaining an effective system of
internal controls over compliance with federal and state laws
and regulations concerning dividend restrictions and federal
laws and regulations concerning loans to insiders.
Management has assessed it compliance with the aforementioned
laws and regulations. Based on this assessment, management
believes that the Corporation's insured depository subsidiary,
First Farmers and Merchants National Bank, complied, in all
material respects, with such laws and regulations during the
year ended December 31, 1998.
/s/ Waymon L. Hickman /s/ Patricia N. McClanahan
Waymon L. Hickman Patricia N. McClanahan
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Columbia, Tennessee
March 5, 1999
<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, 1998, 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
March 5, 1999
1200 Parkway Towers
404 James Robertson Parkway
Nashville, TN 37219-1598
(615) 242-7351 * FAX 256-1952
Also in Columbia and Lebanon, TN
c. The "OPINION" module contains the Reports of Independent
Certified Public Accountants 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 (the
Corporation) was incorporated on March 31, 1982, as a Tennessee
corporation. As of December 31, 1998, the only subsidiary of
the Corporation was First Farmers and Merchants National Bank
(the Bank). The Bank is a national banking association which
was organized in 1954 as a successor to a state bank organized
in 1909. The resulting financial condition of the Corporation
should be evaluated in terms of the Bank's operations within its
service area.
During 1998, First Farmers and Merchants National Bank
reaffirmed its commitment to community service by recognizing
good neighbors in the four counties in middle Tennessee that it
serves. "Hello Neighbor" was the theme of this challenge 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 1998, 1997, and 1996; however, financial
information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with
the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements included elsewhere in this
material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial
condition depends on the quality and nature of its assets, its
liability and capital structure, the market and economic
conditions, and the quality of its personnel. Commercial
banking in the marketing area served by the Bank is highly
competitive. Although the Bank is ranked as the largest bank in
the area in terms of total deposits, the Bank faces substantial
competition from fourteen (14) other banks, two (2) savings and
loan associations, and several credit unions located in the
marketing area. The following paragraphs provide a unique
perspective on the internal structures of the Corporation and
the Bank that provide the strength in our organization.
Summary
The Bank reported net income of $7.3 million for 1998
compared to $7.1 million in 1997 and $6.9 million in 1996. On a
per common share basis, net income was $2.62 for 1998 versus
$2.52 for 1997 and $2.45 for 1996. The improvement in 1998's
earnings resulted from a consistent gross margin reinforced by
maintaining a steady, though competitive, cost of funds even though
deposits grew over 6.4% as loan demand softened and credit
underwriting standards tightened reducing net loans about 3.7%.
Strong noninterest income growth was sufficient to cover a smaller
increase in noninterest expenses and, combined with the decrease in taxes,
offset the higher additions to the allowance for loan losses.
The return on average equity for 1998 was 11.7% compared
to 12.2% for 1997 and 13.2% for 1996. The return on average
assets was 1.33% for 1998 versus 1.34% for 1997 and 1.37% for 1996.
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
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> <C>
Loans, net $ 321,239 9.09% $ 29,187 *$ 314,198 9.18% $ 28,858 *$ 290,413 9.43% $ 27,373 *
Bank time deposits 4 - - 1 - - 1 - -
Taxable securities 123,711 6.27 7,751 113,013 6.35 7,173 118,114 6.14 7,256
Tax exempt securities 50,457 6.78 3,419 * 47,366 6.96 3,297 * 44,158 7.10 3,134 *
Federal funds sold 12,774 5.39 689 4,631 5.46 253 4,198 5.31 223
TOTAL EARNING ASSETS 508,185 8.08 $ 41,046 479,209 8.26 $ 39,581 456,884 8.31 $ 37,986
Noninterest earning assets
Cash and due from banks 22,561 27,039 25,760
Bank premises and equipment 6,686 6,633 6,708
Other assets 15,222 15,045 13,348
TOTAL ASSETS $ 552,654 $ 527,926 $ 502,700
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities
Time and savings
deposits:
NOW and money
market accounts $ 175,956 3.19% $ 5,616 $ 166,828 3.38% $ 5,634 $ 158,438 3.39% $ 5,338
Savings 48,063 3.22 1,547 43,776 3.37 1,476 37,428 3.22 1,204
Time 151,006 5.28 7,966 152,389 5.29 8,063 151,973 5.40 8,210
Time over $100,000 41,870 5.46 2,285 37,680 5.43 2,045 34,554 5.40 1,866
TOTAL INTEREST BEARING
DEPOSITS 416,895 4.18 17,414 400,673 4.30 17,218 382,393 4.35 16,618
Federal funds purchased 22 4.55 1 1,016 5.80 59 1,043 5.56 58
Other short-term debt 574 5.05 29 538 5.02 27 622 5.79 36
TOTAL INTEREST BEARING
LIABILITIES 417,491 4.18 $ 17,444 402,227 4.30 $ 17,304 384,058 4.35 $ 16,712
Noninterest bearing
liabilities
Demand deposits 66,474 62,903 61,509
Other liabilities 5,657 4,990 5,066
TOTAL LIABILITIES 489,622 470,120 450,633
Stockholders' equity 63,032 57,806 52,067
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 552,654 $ 527,926 $ 502,700
Spread between combined
rates earned and combined
rates paid* 3.90% 3.96% 3.96%
Net yield on interest
-earning assets* 4.64% 4.65% 4.66%
<FN>
<F1>
* Taxable equivalent basis
<F2>
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.
<F3>
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.
<F4>
3. The average balances of the amortized cost of
available-for-sale securities were used in the calculations in
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Table A entitled Distribution of Assets, Liabilities,
and Stockholders' Equity, Interest Rates and Interest
Differential presents for each of the last three years by major
categories of assets and liabilities, the average daily
balances, the components of the gross interest margin (on a
taxable equivalent basis), the yield or rate, and the
incremental and gross interest spread.
Table B sets forth, for the periods indicated, a summary
of changes in interest earned and interest paid separated into
the amount generated by volume changes and the amount generated
by changes in the yield or rate.
TABLE B - Volume and Yield/Rate Variances
(Taxable Equivalent Basis - In Thousands)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 646 $ (317) $ 329 $ 2,243 $ (758) $ 1,485
Investment securities
Taxable securities 679 (101) 578 (314) 231 (83)
Tax-free securities 215 (93) 122 228 (65) 163
Federal funds sold 445 (9) 436 23 7 30
Total interest
earning assets 1,985 (520) 1,465 2,180 (585) 1,595
Interest paid on
NOW and money market
accounts 308 (326) (18) 283 13 296
Savings deposits 144 (73) 71 204 68 272
Time deposits (73) (24) (97) 23 (170) (147)
Time over $100,000 228 12 240 169 10 179
Federal funds purchased (58) - (58) (2) 3 1
Short term debt 2 - 2 (5) (4) (9)
Total interest-
bearing funds 551 (411) 140 672 (80) 592
Net interest earnings $ 1,434 $ (109) $ 1,325 $ 1,508 $ (505) $ 1,003
<FN>
<F5>
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.
<F6>
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.
<F7>
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.
</FN>
</TABLE>
<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 second graph illustrates in thousands of dollars, the
categories of average funding of earning assets and the portion
each category is of the total for the last three years. The
following tables illustrate the data in these graphs.
<TABLE>
AVERAGE EARNING ASSETS
(In Thousands $)
<CAPTION>
Investment
Loans Securities Other
<C> <C> <C> <C>
1998 $ 321,239 $ 174,168 $ 12,774
1997 314,198 160,722 4,613
1996 290,413 162,188 4,199
</TABLE>
<TABLE>
AVERAGE FUNDING OF EARNING ASSETS
(In Thousands $)
<CAPTION>
Interest- Non-Interest-
Bearing Deposits Bearing Deposits Other
<C> <C> <C> <C>
1998 $ 416,895 $ 66,474 $ 5,657
1997 400,673 62,903 4.990
1996 382,393 61,509 5,066
</TABLE>
Average earning assets increased 6.0% in 1998 compared
to a 5.0% increase in 1997 and an 8.4% increase in 1996. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1998, average net loans represented
63.2% of average earning assets. Total average net loans
increased during the last three years showing a 2.2% growth from
1997 to 1998, an 8.2% growth from 1996 to 1997, and a 5.2%
growth from 1995 to 1996. Average investments accounted for the
remaining balance of average earning assets at December 31,
1998, increasing 13.3% from year end 1997. Softening loan
demand and increased competition for loans were behind the
growth in investment securities. Average investments decreased
.8% in 1997 when maturities and calls of investment securities
were used to fund expanding loan demand. 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. Average total assets increased
during the last three years as evidenced by a 4.7% growth from
1997 to 1998, a 5.0% growth from 1996 to 1997, and an 8.4%
growth from 1995 to 1996.
The bank's average deposits grew during the last three
years reflecting a 4.3% growth from 1997 to 1998, a 4.4% growth
from 1996 to 1997, and an 8.4% growth from 1995 to 1996. Short
and medium term rates remained competitive compared to longer
term rates during 1998 and some depositors left money in or
moved money back into interest-bearing transaction accounts,
which increased 5.5% during 1998 and 5.3% in 1997. Over half of
the 6.3% increase during 1996 was attributable to the
acquisition. Average savings deposits increased over 9.8%
during 1998 and almost 17.0% during 1997, and 8.1% during 1996
with over 54% due to the acquisition. Savings deposits have
been strong historically providing a core, low cost, source of
funding. Average certificates of deposit under $100,000
decreased .9% during 1998, increased .3% during 1997, and
increased 11.3%, 60.0% from the acquisition, in 1996.
Certificates of deposit over $100,000 increased 11.1% in 1998
compared to 9.1% in 1997, and 6.3% in 1996, 87.8% from the
acquisition. The Bank's noninterest bearing deposits have
remained consistently strong and were 13.8% of average total
deposits in 1998, 13.6% in 1997, and 13.9% in 1996. This strong
core of noninterest bearing funds contributed to the maintenance
of a consistent low cost of funds for the periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
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, 1998, 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, 1998, 1997, and 1996 was 4.64%, 4.65%, and 4.66%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities
Dollars in Thousands
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1998 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 12,000 $ - $ - $ - $ 12,000
Bank time deposits 18 - - - 18
Taxable investment securities 8,771 8,811 14,000 112,401 143,983
Tax-exempt investment
securities 1,052 1,320 670 51,970 55,012
Loans and leases, net of
deferred fees 46,360 36,644 54,780 182,400 320,184
Total earning assets 68,201 46,775 69,450 346,771 531,197
Interest-bearing liabilities
NOW and money market
accounts 58,566 - 73,393 41,193 173,152
Savings - - 50,945 - 50,945
Time 35,861 33,632 54,690 26,475 150,658
Time over $100,000 15,692 7,747 14,382 4,790 42,611
Other short-term debt 602 - - - 602
Total interest bearing
liabilities 110,721 41,379 193,410 72,458 417,968
Period gap (42,520) 5,396 (123,960) 274,313 113,229
Cumulative gap $ (42,520) $(37,124) $(161,084) $ 113,229 $ -
<FN>
<F8>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include
loan review procedures and approvals. Depending primarily on
the amount of the loan, there are various approval levels
including an Executive Committee of the Board of Directors that
meets weekly.
The Bank has a Loan Review Department which performs
ongoing, independent reviews of specific loans for credit
quality and proper documentation. This department is
centralized and independent of the lending function. Regular
reports are made to senior management and the Executive
Committee of the Board of Directors regarding the credit quality
of the loan portfolio, as well as trends. Every loan is
assigned a risk rating by the loan officer subject to review by
Loan Review. The Bank also has a Credit Administrator who is
responsible for assisting loan officers in structuring new
loans, reviewing problem loans, monitoring their status from
period to period, and assisting in their resolution. This
analysis and review also includes a formal review that is
prepared quarterly to assess the risk in the loan portfolio and
to determine the adequacy of the allowance for loans losses.
This review supported management's assertion that the allowance
was adequate at December 31, 1998.
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 $3.8 million at
December 31, 1998, have been identified as impaired in
accordance with the provisions of SFAS 114. They represent 1.2%
of gross loans. Commercial loans comprised $.6 million of the
total, with loans secured by real estate accounting for $2.4
million, and installment loans $.8 million. The gross interest
income that would have been recorded during 1998 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 $519, $431, and $374 thousand
for the years ended December 31, 1998, 1997, and 1996
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
<CAPTION>
December 31
(Dollars In Thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding $ 321,239 $ 314,198 $ 290,413 $ 276,166 $ 247,791
Balance of allowance for
possible loan losses at
beginning of year $ 2,943 $ 2,926 $ 2,678 $ 2,342 $ 2,024
Loans charged off
Loans secured by
real estate 619 88 368 15 135
Commercial and industrial
loans 1,041 605 141 170 42
Individuals 914 1,371 879 371 246
TOTAL LOANS CHARGED OFF 2,574 2,064 1,388 556 423
Recoveries of loans
previously charged off
Loans secured by
real estate 1 8 111 97 9
Commercial and industrial
loans 61 53 42 14 36
Individuals 121 80 183 111 36
TOTAL RECOVERIES 183 141 336 222 81
NET LOANS CHARGED OFF 2,391 1,923 1,052 334 342
Provision charged to
operating expenses 3,300 1,940 1,300 670 660
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES
AT END OF YEAR $ 3,852 $ 2,943 $ 2,926 $ 2,678 $ 2,342
Ratio of net charge-offs
during the period to
average loans
outstanding 0.74% 0.61% 0.36% 0.12% 0.14%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital
needs of the Bank. At December 31, 1998, the Corporation had a
ratio of tier 1 capital to average assets of 11.19%. This
compares to a ratio of tier 1 capital to average assets of
11.17% at December 31, 1997, and 10.56% at December 31, 1996.
Cash dividends declared in 1998 were three times more than
those paid in 1997. The dividend to net income ratio was 62%.
Additional dividends of approximately $13.8 million to the
Corporation could have been declared by the subsidiary bank
without regulatory agency approval. The Corporation plans to
continue an average payout ratio over 20% while continuing to
maintain a capital to asset ratio reflecting financial strength
and adherence to regulatory guidelines.
As of December 31, 1998, the Corporation's ratios of Tier
I capital to risk-weighted assets and total capital to
risk-weighted assets were 19.7% and 20.9% respectively. At
December 31, 1997, the comparable ratios were 18.7% and 19.7%,
respectively. Please refer to Note 10 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials
sent to our stockholders, illustrates the average equity of the
Corporation for the last six years. The following table is the
data illustrated by this graph in thousands of dollars.
<TABLE>
<C> <C>
1992 $ 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
1998 63,032
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 3.6% in 1998 with income
from the increased volume of securities supplementing loan
income as loan volume softened. Interest and fees earned on
loans increased over 1.0% in 1998 accounting for 72.8% of gross
interest income. Interest earned on investment securities and
other investments increased 11.1% in 1998 contributing 27.2% to
the total. Total interest income increased 4.2% in 1997 and
7.5% in 1996.
Interest Expense
Total interest expense increased less than 1.0% in 1998
bolstering net interest margin. This increase compares
favorably to a 3.6% increase in 1997, and an 8.4% increase in
1996, about half of which can be attributed to the acquisition.
The cost of interest-bearing deposits remained steady all year
under monthly monitoring by the Asset/Liability Committee. The
net interest margin (tax equivalent net interest income divided
by average earning assets) was 4.64% at the end of 1998, 4.65%
at the end of 1997, and 4.66% at the end of 1996.
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 9.0% during 1998 led by gains
on the sale of other real estate. Income from fiduciary
services provided in the Bank's Trust Department remained
strong. Noninterest income increased 19.6% in 1997 and a 28.4%
increase in 1996.
Noninterest expenses, excluding the provision for possible
loan losses, increased 2.2% in 1998 which compares favorably
with the 6.2% increase in 1997 and the 5.8% increase in 1996.
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 almost 2% from 1997.
A pie chart is included at this point in the materials
sent to our stockholders illustrating the composition of
noninterest income in 1998 and the percentage each category is
of the total. The following table is the data illustrated by
this graph in thousands of dollars.
</TABLE>
<TABLE>
1998 Noninterest Income
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,516 20.0%
Other service fees 1,043 14.0%
Securities gains 355 5.0%
Fees on deposits 3,665 48.0%
Other 985 13.0%
</TABLE>
A pie chart is included at this point in the materials snt
to out stockholders illustrating the composition of noninterest
expense in 1998 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
1998 Noninterest Expense
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,776 47.0%
Furniture and equipment 1,472 9.0%
Occupancy 1,342 8.0%
Other 5,830 36.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
Consolidated Statements of Income
Dollars in Thousands Except Per Share Data
<CAPTION>
1998 1997 1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $ 29,155 $ 28,841 $ 27,344 $ 25,858 $ 21,131
Income on investment
securities
Taxable interest 7,326 6,803 6,892 6,179 7,012
Exempt from federal
income tax 2,583 2,488 2,367 2,157 2,185
Dividends 300 261 257 178 205
10,209 9,552 9,516 8,514 9,402
Other interest income 689 254 223 122 284
TOTAL INTEREST INCOME 40,053 38,647 37,083 34,494 30,817
INTEREST EXPENSE
Interest on deposits 17,414 17,218 16,618 15,248 12,771
Interest on other short
term borrowings 30 86 94 174 93
TOTAL INTEREST EXPENSE 17,444 17,304 16,712 15,422 12,864
NET INTEREST INCOME 22,609 21,343 20,371 19,072 17,953
PROVISION FOR POSSIBLE LOAN
LOSSES 3,300 1,940 1,300 670 660
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,309 19,403 19,071 18,402 17,293
NONINTEREST INCOME
Trust department income 1,516 1,471 1,324 1,252 1,249
Service fees on deposit
accounts 3,669 3,744 3,374 2,697 2,318
Other service fees,
commissions, and fees 1,043 845 745 300 337
Other operating income 985 394 363 323 319
Securities gains (losses) 351 488 - 1 (243)
TOTAL NONINTEREST INCOME 7,564 6,942 5,806 4,573 3,980
NONINTEREST EXPENSES
Salaries and employee
benefits 7,776 7,319 7,030 6,621 6,248
Net occupancy expense 1,356 1,317 1,211 1,279 1,190
Furniture and equipment
expense 1,472 1,500 1,581 1,383 1,070
Other operating expenses 5,816 5,927 5,299 5,057 5,000
TOTAL NONINTEREST EXPENSES 16,420 16,063 15,121 14,340 13,508
INCOME BEFORE PROVISION
FOR INCOME TAXES 10,453 10,282 9,756 8,635 7,765
PROVISION FOR INCOME TAXES 3,112 3,228 2,889 2,519 2,204
NET INCOME $ 7,341 $ 7,054 $ 6,867 $ 6,116 $ 5,561
EARNINGS PER COMMON SHARE
(2,800,000 outstanding
shares) - Note 1 $ 2.62 $ 2.52 $ 2.45 $ 2.18 $ 1.99
</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 4.1% higher in 1998 than in 1997. As
indicated earlier, the improvement in 1998's earnings resulted
from a consistent gross margin reinforced by a steady cost of
funds. Strong noninterest income growth was sufficient to cover
a smaller increase in noninterest expenses and, combined with a
decrease in taxes, offset the higher additions to the allowance
for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has been adopted by the Corporation as follows:
(1) 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. As of December 31, 1998, the
Corporation or the Bank did not have any reportable segments.
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.
133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities" which will require entities to recognize all
derivatives in their financial statements as either assets or
liabilities measured at fair value. The statement specifies new
methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting.
Management does not believe this statement will have any
material effect on future financial statements. (2) Statement
of Financial Accounting Standards No. 134 (SFAS 134),
"Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" requires a mortgage banking entity that
securitizes mortgage loans held for sale to classify any
retained mortgage-backed securities and other retained interests
based on the entity's ability and intent to sell or hold those
investments. Retained mortgage-backed securities should be
classified as trading, available-for-sale, or held-to-maturity,
as provided under SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities." However, a mortgage banking
enterprise is required to classify as trading any retained
mortgage-backed securities that it commits to sell before or
during the securitization process. The statement is effective
for the first fiscal quarter beginning after December 15, 1998.
Management does not believe this statement will have any
material effect on future financial statements.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force was established to
evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing;
representations have been obtained, and satisfactorily tested,
from our software and hardware vendors, confirming their Year
2000 compatibility. Testing of systems' compatibility was 90%
complete for all areas and 100% complete for core application
processing, by December 31, 1998. The committee plans to have
all testing complete and software changes made by June 30, 1999.
Significant expenses relating to this issue have been limited
because the Bank uses an outside core processor. However, the
task force developed a budget and continually reviews expenses
as they emerge, reporting to the Board of Directors quarterly.
Expenses are not expected to have a material impact on the
financial statements of the Corporation. The Bank has developed
contingency plans for the most critical operational areas. No
material effect on operations is anticipated in preparing for
potential risks. Management believes that all information
systems will be Year 2000 compliant.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
SHAREHOLDER INFORMATION
The 2,800,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1998 had a
market value of $128.8 million and were held by 1,729
identifiable individuals located mostly in the market area. A
small number of additional shareholders are not identified
individually since some bank nominees, including the bank's
Trust Department, are listed as single owners when, in fact,
these holdings represent large numbers of shareholders. No
single shareholder's ownership exceeded five percent at year end.
There is no established public trading market for the
stock. The table at the right shows the high and low price of
the Corporation's common stock, as well as the semiannual
dividend paid per share, in each of the last three years. The
table and the graphs below show the earnings and dividends per
share and the dividend payout ratio for the last five years.
<TABLE>
Estimated Price Range and Dividends per Share
<CAPTION>
High Low Dividend
<C> <S> <C> <C> <C>
1998 First Quarter $ 40.00 $ 39.00 $ -
Second Quarter 45.00 40.00 0.31
Third Quarter 46.00 45.00 -
Fourth Quarter 46.00 46.00 1.32
1997 First Quarter 33.50 32.50 -
Second Quarter 34.50 34.50 0.27
Third Quarter 36.00 35.00 -
Fourth Quarter 39.00 36.00 0.28
1996 First Quarter 28.00 28.00 -
Second Quarter 29.00 28.00 0.24
Third Quarter 31.50 30.00 -
Fourth Quarter 32.50 31.50 0.26
</TABLE>
<TABLE>
Common Dividend Payout Ratio
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Earnings per share $ 2.62 $ 2.52 $ 2.45 $ 2.18 $ 1.99
Cash dividend
per share $ 1.63 $ 0.55 $ 0.49 $ 0.44 $ 0.40
Ratio 62% 22% 20% 20% 20%
</TABLE>
Two color graphs are included at the bottom of this
page in the materials sent to our stockholders. The first one
illustrates net income for the last five years using information
taken from the "FIVE YEAR CONSOLIDATED STATEMENTS OF INCOME"
table included on page 20 of the Management Discussion. The
second one illustrates earnings per share with cash dividends
for the last five years as stated in the table COMMON DIVIDEND
PAYOUT RATIO above.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
<TABLE>
COMPARATIVE DATA
(Dollars in Thousands)
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Average assets $ 552,654 $ 527,926 $ 502,700 $ 463,739 $ 451,953
Average loans (net) $ 321,239 $ 314,198 $ 290,413 $ 276,166 $ 247,791
Average deposits $ 483,369 $ 463,576 $ 443,902 $ 409,489 $ 404,412
Return on
average assets 1.33% 1.34% 1.37% 1.32% 1.23%
Return on
beginning equity 12.21% 12.97% 14.01% 13.95% 14.11%
Tier 1 capital
to average assets 11.19% 11.17% 10.56% 10.45% 9.61%
</TABLE>
Three color graphs are included below this table which was
sent in the materials sent to our stockholders. They
illustrate average assets, average net loans, and average
deposits for the last five years using information from the
"COMPARATIVE DATA" table above.
<TABLE>
NET INTEREST MARGIN
(Dollars in Thousands)
<CAPTION>
1998 1997 1996 1995 1994
Interest income
<S> <C> <C> <C> <C> <C>
(tax equivalent) $ 41,046 $ 39,581 $ 37,986 $ 35,626 $ 32,039
Interest expense 17,444 17,304 16,712 15,422 12,864
$ 23,602 $ 22,277 $ 21,274 $ 20,204 $ 19,175
Net interest margin* 4.64% 4.65% 4.66% 4.79% 4.68%
<FN>
<F9>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
The final graph illustrates net interest income for the
last five years. The data was taken from the net interest
margin section in the "NET INTEREST MARGIN" table above.
d. The "MGMT_DISC" module contains the Management's Discussion
and Analysis of Financial Condition and Results of Operation
which is a part of the Annual Report to Stockholders which
is included in this filing.
<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.
Employees
FFMC has no employees. Its subsidiary, the Bank had
approximately two hundred (200) full time employees and
sixty-four (64) 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, 1998, 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 2.6630% interest in two motel propertities located in
Cleveland and Columbia, Tennessee. The properties are not
depreciated.
Item 3. Legal Proceedings.
There are no material pending legal proceedings known to the
Board of Directors in which any director or executive officer or
principal 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, 1998.
<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.
Item 6. Selected Financial Data.
The selected financial data is incorporated herein by reference
to Consolidated Financial Statements, Notes to Consolidated
Financial Statements, and Management's Discussion and Analysis
of Financial Condition and Results of Operation which are a part
of the Annual Report to Stockholders which is included in this
filing.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial condition and
results of operations is incorporated herein by reference to
Management's Discussion and Analysis of Financial Condition and
Results of Operations which are a part of the Annual Report to
Stockholders which is included in this filing.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data are incorporated
herein by reference to Consolidated Financial Statements, Notes
to Consolidated Financial Statements, and Management's
Discussion and Analysis of Financial Condition and Results of
Operation which are a part of the Annual Report to Stockholders
which is included in this filing.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to First Farmers and Merchants Corporation's
definitive Proxy Statement (incorporated herein by reference)
pursuant to Regulation 14 A, Solicitation of Proxies, which
involves the election of Directors. The present terms of
Directors and officers extend to April 20, 1999.
<PAGE>
Executive Officers of Registrant
The following is a list as of March 15, 1999, 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 64 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 3
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 47 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 Presi-
dent 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 48 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 Presi-
dent 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 54 None Assistant Secretary of
FFMC. Assistant Vice
President and Executive
Assistant of the Bank.
Employed in 1974.
Promoted to Customer
Service Representative
tive Assistant in 1984.
Promoted to Assistant
Vice President/Executive
Assistant in 1991. Named
Assistant Secretary of
FFMC December 17, 1996.
Patricia N. McClanahan 54 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 Transaction.
Reference is made to First Farmers and Merchants Corporation's
definitive Proxy Statement (incorporated herein by reference)
pursuant to Regulation 14 A, Solicitation of proxies, which
involves the election of directors.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.*
(a) (1) and (2) - The response to this portion of Item
14 is submitted as a separate section of this report.
(3) - The following exhibits are filed herewith:
(13) Annual report to stockholders
(d) Financial Statement Schedules - The response
to this portion of Item 14 is submitted as a separate
section of this report.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST FARMERS AND MERCHANTS CORPORATION
BY /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board and Chief Executive Officer
(Chairman of the Board and Chief Executive Officer of the Bank)
Date March 16, 1999
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 16, 1999
/s/ Patricia N. McClanahan
Patricia N. McClanahan, Treasurer
(Chief Financial Officer of the Bank)
Date March 16, 1999
<PAGE>
Signatures -- continued
Signatures -- continued
/s/ Kenneth A. Abercrombie
Kenneth A.Abercrombie, Director
Date March 16, 1999
/s/ James L. Bailey, Jr.
James L. Bailey, Jr., Director
Date March 16, 1999
/s/ Flavius A. Barker
Flavius A. Barker, Director
Date March 16, 1999
/s/ Harlan D. Bowsher
Harlan D. Bowsher, Director
Date March 16, 1999
/s/ Hulet M. Chaney
Hulet M. Chaney, Director
Date March 16, 1999
/s/ H. Terry Cook, Jr.
H. Terry Cook, Jr. , Director
Date March 16, 1999
/s/ W. J. Davis, Jr.
W. J. Davis, Jr., Director
Date March 16, 1999
/s/ Thomas Napier Gordon
Thomas Napier Gordon, Director
Date March 16, 1999
/s/ Edwin W. Halliday
Edwin W. Halliday, Director
Date March 16, 1999
/s/ Waymon L. Hickman
Waymon L. Hickman, Director
Date March 16, 1999
/s/ Tillman Knox
Tillman Knox, Director
Date March 16, 1999
/s/ Joe E. Lancaster
Joe E. Lancaster, Director
Date March 16, 1999
/s/ T. Randy Stevens
T. Randy Stevens, Director
Date March 16, 1999
/s/ Dan C. Wheeler
Dan C. Wheeler, Director
Date March 16, 1999
/s/ David I. Wise
David I. Wise, Director
Date March 16, 1999
/s/ W. Donald Wright
W. Donald Wright, Director
Date March 16, 1999
<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, 1998
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
<PAGE>
FORM 10-K -- ITEM 14(a)(1) and (2)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statements of First Farmers
and Merchants Corporation and Subsidiary, included in the annual
report of the registrant to its security holders for the year
ended December 31, 1998, are incorporated by reference in Item 8:
Consolidated balance sheets -- December 31, 1998 and 1997
Consolidated statements of income -- Years ended December 31, 1998,
1997, and 1996
Consolidated statements of cash flows -- Years ended December 31,
1998, 1997, and 1996
Notes to consolidated financial statements -- December 31, 1998
The following financial statement schedules of First Farmers and
Merchants Corporation and subsidiary are included in Item 14(d):
None
All other schedules to the consolidated financial statements
required by Article 9 of Regulation S-X and all other schedules
to the financial statements of the registrant required by
Article 5 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore, have been
omitted.
<PAGE>
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
Exhibit Number Title or Description
(13) Annual Report to Stockholders
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FIRST FARMERS AND MERCHANTS CORPORATION
This is a draft of the annual report to the Securities and
Exchange Commission (SEC), Form 10-K, as of December 31, 1998.
This page of manual signatures is required to be kept on file at
our bank as part of the copy of this report. Page 10 in the
draft will be filed electronically with the report sent to the
SEC and the Federal Reserve Bank. Thank you for your help in
completing this reporting requirement.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,136,536
<INT-BEARING-DEPOSITS> 18,337
<FED-FUNDS-SOLD> 12,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 84,346,923
<INVESTMENTS-CARRYING> 114,648,276
<INVESTMENTS-MARKET> 118,010,088
<LOANS> 320,184,206
<ALLOWANCE> (3,851,713)
<TOTAL-ASSETS> 570,411,235
<DEPOSITS> 500,530,570
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,730,601
<LONG-TERM> 0
0
0
<COMMON> 28,000,000
<OTHER-SE> 35,150,064
<TOTAL-LIABILITIES-AND-EQUITY> 570,411,235
<INTEREST-LOAN> 29,154,579
<INTEREST-INVEST> 10,208,945
<INTEREST-OTHER> 689,216
<INTEREST-TOTAL> 40,052,740
<INTEREST-DEPOSIT> 17,414,185
<INTEREST-EXPENSE> 17,443,697
<INTEREST-INCOME-NET> 22,609,043
<LOAN-LOSSES> 3,300,000
<SECURITIES-GAINS> 351,055
<EXPENSE-OTHER> 16,419,742
<INCOME-PRETAX> 10,452,825
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,340,612
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.64
<LOANS-NON> 3,856,520
<LOANS-PAST> 65,938
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,943,000
<CHARGE-OFFS> 2,574,779
<RECOVERIES> 183,492
<ALLOWANCE-CLOSE> 3,851,713
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
