SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended March 31, 2000
Commission file number 0-10972
First Farmers and Merchants Corporation
(Exact name of registrant as specified in its charter)
Tennessee 62-1148660
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) 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)
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's common
stock, as of March 31, 2000. 2,920,000 shares
_________________
This filing contains 12 pages.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited consolidated financial statements of the
registrant and its subsidiary for the three months ended March 31, 2000,
are as follows:
Consolidated balance sheets - March 31, 2000, and December 31, 1999.
Consolidated statements of income - For the three months ended March 31,
2000, and March 31, 1999.
Consolidated statements of cash flows - For the three months ended March
31, 2000, and March 31, 1999.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
______________________________________________________________________________
March 31 December 31
(Dollars in Thousands) (Unaudited) 2000 1999
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 22,792 $ 23,404
Federal funds sold 7,100 2,300
Securities
Available for sale (amortized cost
$110,542 and $114,278 respectively) 108,059 111,870
Held to maturity (fair value $125,998
and $121,954 respectively) 128,787 124,410
Total securities 236,846 236,280
Loans, net of deferred fees 346,614 335,999
Allowance for possible loan losses (4,931) (4,818)
Net loans 341,683 331,181
Bank premises and equipment, at cost
less allowance for depreciation 8,219 8,306
Other assets 18,831 18,617
_________ _________
TOTAL ASSETS $ 635,471 $ 620,088
______________________________________________________________________________
LIABILITIES Deposits
Noninterest-bearing $ 82,893 $ 78,454
Interest-bearing (including
certificates of deposit over
$100,000: 2000 - $51,853; 1999 -
$49,066) 471,215 462,362
_________ _________
Total deposits 554,108 540,816
_________ _________
Securities sold under agreements to
repurchase 422 236
Dividends payable - 1,051
Other short term liabilities 603 733
Accounts payable and accrued
liabilities 6,276 5,176
_________ _________
TOTAL LIABILITIES 561,409 548,012
______________________________________________________________________________
STOCKHOLDERS' Common stock - $10 par value,
EQUITY 8,000,000 shares authorized;
issued and outstanding - 2,920,000 29,200 29,200
Additional paid-in capital 4,320 4,320
Retained earnings 42,082 40,049
Accumulated other comprehensive income (1,540) (1,493)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 74,062 72,076
_________ _________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 635,471 $ 620,088
______________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
______________________________________________________________________________
<CAPTION>
(Dollars In Thousands Except Per Share Data) (Unaudited)
Three Months Ended March 31, 2000 1999
______________________________________________________________________________
<S> <C> <C> <C>
INTEREST INCOME Interest and fees on loans $ 7,322 $ 6,914
______ ______
Income on investment securities
Taxable interest 2,607 2,148
Exempt from federal income tax 740 725
Dividends 51 51
______ ______
3,398 2,924
______ ______
Other interest income 143 114
TOTAL INTEREST INCOME 10,863 9,952
______________________________________________________________________________
INTEREST EXPENSE Interest on deposits 4,980 4,216
Interest on other short term
borrowings 14 9
_____ ______
TOTAL INTEREST EXPENSE 4,994 4,225
_____ ______
NET INTEREST INCOME 5,869 5,727
PROVISION FOR POSSIBLE LOAN LOSSES 225 650
_____ ______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,644 5,077
______________________________________________________________________________
NONINTEREST INCOME Trust department income 478 405
Service fees on deposit accounts 1,132 951
Other service fees, commissions,
and fees 90 235
Other operating income 165 140
_____ _____
TOTAL NONINTEREST INCOME 1,865 1,731
______________________________________________________________________________
NONINTEREST EXPENSES Salaries and employee benefits 2,436 2,071
Net occupancy expense 354 350
Furniture and equipment expense 296 345
Other operating expenses 1,632 1,646
_____ _____
TOTAL NONINTEREST EXPENSES 4,718 4,412
_____ _____
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,791 2,396
PROVISION FOR INCOME TAXES 757 631
______________________________________________________________________________
NET INCOME $ 2,034 $ 1,765
______________________________________________________________________________
EARNINGS PER SHARE Common stock
(Weighted average shares
outstanding:
2000 - 2,920,000
1999 - 2,873,333) $ 0.70 $ 0.61
______________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
______________________________________________________________________________
<CAPTION>
(Dollars In Thousands) (Unaudited)
Three Months Ended March 31, 2000 1999
______________________________________________________________________________
<S> <C> <C> <C>
OPERATING Net income $ 2,034 $ 1,765
ACTIVITIES Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 112 271
Provision for depreciation and
amortization of premises and
equipment 271 275
Provision for depreciation of leased
equipment 75 75
Amortization of deposit base intangibles 56 38
Amortization of investment security
premiums, net of accretion of discounts 194 220
Increase in cash surrender value of life
insurance contracts (56) (52)
Deferred income taxes (70) (66)
(Increase) decrease in
Interest receivable (623) (483)
Other assets 433 (419)
Increase (decrease) in
Interest payable 370 26
Other liabilities 785 93
_____ _____
Total adjustments 1,547 (22)
_____ _____
Net cash provided by operating
activities 3,581 1,743
______________________________________________________________________________
INVESTING Proceeds from maturities, calls, and
ACTIVITIES sales of available-for-sale securities 6,502 8,552
Proceeds from maturities and calls of
held-to-maturity securities 500 6,671
Purchases of investment securities
Available-for-sale (2,898) (7,579)
Held-to-maturity (4,939) (10,258)
Net (increase) decrease in loans (10,615) 4,339
Purchases of premises and equipment (184) (493)
Acquisition of other assets - 2,789
________ ______
Net cash used by investing
activities (11,634) 4,021
______________________________________________________________________________
FINANCING Net increase (decrease) in noninterest-
ACTIVITIES bearing and interest-bearing deposits 13,292 (851)
Cash dividends (1,051) (896)
______ ______
Net cash provided by financing
activities 12,241 (1,747)
______________________________________________________________________________
Increase (decrease) in cash and cash
equivalents 4,188 4,017
Cash and cash equivalents at beginning
of year 25,704 33,155
________ ______
Cash and cash equivalents at end of
year $ 29,892 $ 37,172
______________________________________________________________________________
</TABLE>
<PAGE>
The unaudited consolidated financial statements have been prepared on a
consistent basis and in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. These adjustments were of a normal,
recurring nature and consistent with generally accepted accounting principles.
For further information, refer to the consolidated financial statements and
footnotes included in the Corporation's annual report on Form 10-K for the
year ended December 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
Material Changes in Financial Condition
Average earning assets increased 5.7% in the first three months of 2000
compared to a 3.7% increase in the first three months of 1999. As a financial
institution, the Bank's primary earning asset is loans. At March 31, 2000,
average net loans had increased 5.1% and represented 57.3% of average earning
assets. Loan growth had slowed during 1998 and most of 1999, even decreasing
slightly, as increased competition and reaffirmation of strong credit
standards in our new markets softened loan demand. However, loan growth and
loan quality has steadily increased since the third quarter of 1999. Average
investments represented 42.7% of average earning assets at March 31, 2000, an
increase of 6.5% in the first three months of 2000. Average total assets were
$632 million at the end of the first three months of 2000 compared to $573
million at the end of the first three months of 1999. Period-end assets were
$635 million compared to $620 million at December 31, 1999.
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. The following sections analyze the average
balance sheet and the major components of the period-end balance sheet.
SECURITIES
Available-for-sale securities are an integral part of the asset/liability
management process. As such, they represent an important source of liquidity
available to fund loans and accommodate asset reallocation strategies dictated
by changes in bank operating and tax plans, shifting yield spread
relationships, and changes in configuration of the yield curve. At March 31,
2000, the Corporation's investment securities portfolio had $108.1 million
available-for-sale securities and $128.8 million held-to-maturity securities.
There were $111.9 million available-for-sale securities and $124.4 million
held-to-maturity securities at December 31, 1999.
LOANS
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 average loan portfolio increased $16.3
million or 5.1% in the first three
<PAGE>
months of 2000 compared to a $4.9 million or 1.5% decrease in the first three
months of 1999. Commercial loans increased 3.6%, personal loans decreased
2.3%, and loans secured by real estate posted a 7.1% growth for the first
three months of 2000. An asset/liability strategic decision to keep higher
quality mortgage loans in the portfolio, rather than sell them in the
secondary market, contributed to the increase in this type of loans.
The Corporation's subsidiary loan review function reviews lines of credit
over $75,000. After this review during the first three months of 2000, loans
totaling $1.4 million, .40% of the portfolio, were classified as other assets
especially mentioned, which is higher than loans totaling $1.0 million so
classified at December 31, 1999, $.8 million so classified at September 30 and
June 30, but down from the $1.8 million so classified at March 31, 1999.
Loans totaling $14.4 million, 4.2% of the portfolio, were classified as
substandard at March 31, 2000, which is almost the same as loans so classified
at December 31, 1999, but lower than the $15.0 million at September 30, 1999,
the $16.0 million at June 30, 1999, and the $15.6 million so classified at
March 31, 1999. Loans totaling $1.9 million, .5% of the portfolio, were
classified as doubtful at March 31, 2000, which is about the same as the $1.8
million so classified at December 31, 1999, the $1.9 million at September 31,
1999, and June 30, 1999, but less than the $2.6 million so classified at
March 31, 1999. Any loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention do not represent or result from
trends or uncertainties which management reasonably expects will materially
affect operating results, liquidity, or capital resources. Management is not
aware of any known trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on the corporation's liquidity,
capital resources or operations. Loans having recorded investments of $4.6
million, 1.3% of the total portfolio, were identified as impaired at the
end of the first three months of 2000 compared to $3.7 million at December 31,
1999, $2.5 million at September 30, 1999, $2.9 million at June 30, 1999, and
$3.3 million at March 30, 1999.
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in those particular financial instruments. The total
outstanding loan commitments and stand-by letters of credit in the normal
course of business at March 31, 2000, were $32.6 million and $2.6 million
respectively. Loan commitments are agreements to lend to a customer as long
as there is not a violation of any condition established in the contract.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in making a loan.
The loan portfolio is well diversified with loans generally secured by
tangible personal property, real property, or stock. The loans are expected
to be repaid from cash flow or proceeds from the sale of selected assets of
the borrowers. Collateral requirements for the loan portfolio are based on
credit evaluation of the customer. It is management's opinion that there is
not a concentration of credit risk in the portfolio.
<PAGE>
DEPOSITS
The Bank does not have any foreign offices and all deposits are serviced
in its eighteen domestic offices. The bank's average deposits grew during the
first three months of 2000 reflecting a 5.3% growth compared to a 3.7% growth
in the first three months of 1999. Short and medium term rates were less
competitive compared to longer term rates. This was a contributing factor to
the 3.7% growth in average interest-bearing checking accounts, the 7.6% growth
in certificates of deposits under $100 thousand, and the 8.7% growth in
certificates of deposit over $100 thousand in the first three months of 2000.
Savings deposits with limited transactions increased 6.5% during the first
three months of 2000. Savings deposits have been strong historically
providing a core, low cost, source of funding.
CAPITAL
Average shareholders' equity in the first three months of 2000 remained
strong totaling $72.9 million at March 31, 2000, a 3.9% increase from 1999
year end. The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet capital adequacy
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that could have a direct material effect
on the consolidated financial statements of the Corporation and its subsidiary,
the Bank. The regulations require the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts and
ratios of Total Capital and Tier I Capital to risk-weighted assets and of Tier
I Capital to average assets. Equity capital (net of certain adjustments for
intangible assets and investments in non-consolidated subsidiaries and certain
classes of preferred stock) are considered Tier 1 ("core") capital. Tier 2
("total") capital consists of core capital plus subordinated debt, some types
of preferred stock, and a defined percentage of the allowance for possible
loan losses. As of March 31, 2000, the Corporation's total risk-based and
core capital ratios were 21.5% and 20.3% respectively. The comparable ratios
were 22.0% and 20.7% at year end 1999. As of March 31, 2000, the Bank's
total risk-based and core capital ratios were 21.3% and 20.1% respectively.
The comparable ratios were 21.7% and 20.5% at year end 1999. As of March 31,
2000, the Corporation and the Bank had a ratio of core capital to average
total assets of 11.8% and 11.6% respectively, compared to 11.4% and 11.3% at
December 31, 1999. Management believes, as of March 31, 2000, 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.
Most of the capital needs of the Bank have historically been financed
through internal growth. 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
<PAGE>
of the preceding two years. As of March 31, 2000, additional dividends of
approximately $10 million could have been declared by the Bank to the
Corporation without regulatory agency approval.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force was established in 1998 to evaluate
the mission critical software and hardware that must be compatible for
continued satisfactory data processing in the Year 2000. The Bank has
developed comprehensive contingency/business continuation plans. No
significant expenses relating to this issue arose and all branches and
internal departments were found to be Year 2000 compliant.
Material Changes in Results of Operations
Total interest income was 9.2% higher in the first three months of 2000
than the first three months of 1999. Interest and fees earned on loans
increased 5.9% due to the increase in the volume of average loans. Interest
earned on investment securities and other investments increased 16.5% compared
to the first three months of 1999 due to the increased volume of securities.
Total interest expense in the first three months of 2000 compared to the
first three months of 1999 increased 18.2%. The total cost of interest-
bearing deposits has slowly increased in a rising rate environment but is
monitored monthly by the Asset/Liability Committee. 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 March 31, 2000, 1999, and December, 31, 1999 was 4.19%,
4.55%, and 4.40% respectively.
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.
The analysis and review of asset quality by the Bank's loan review
function and credit administrator 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 March 31, 2000.
Additions to the allowance during the first three months of 2000 were lower
than the first three months of 1999. The allowance for possible loan and
lease losses was $4.9 million or 1.42% of gross loans at March 31, 2000 which
compares to $4.3 million or 1.35% at March 31, 1999. Net charge offs for the
first quarter of 2000 were $112 thousand, an annualized net charge off ratio
of .13%. Earnings coverage of
<PAGE>
net charge offs was over 18.1% at March 31, 2000. Net charge offs for the
first quarter of 1999 were $379 thousand, an annualized net charge off ratio
of .48%. Earnings coverage of net charge offs was just over 4.6% at March 31,
1999. Non-performing loans as a percentage of the allowance for possible
loan and lease losses was 69.4% at the end of the first quarter of 2000
compared to 91.0% at the end of the first quarter of 1999. The emphasis to
strengthen credit underwriting standards has contributed to these improved
ratios.
There were no write downs of other real estate associated with declines
in real estate values subsequent to foreclosure and disposition of the
properties at less than their carrying value during the first three months of
2000. The carrying value of other real estate is included in other assets on
the face of the balance sheet and represents real estate acquired through
foreclosure and is stated at the lower of cost or fair value minus cost to
sell. An allowance for other real estate owned is not maintained. Any
decreases or losses associated with the properties have been charged to
current income. Management evaluates properties included in this category on
a regular basis. Actual foreclosures were included in the carrying value
for other real estate at March 31, 2000, December 31, 1999, and March 31, 1999,
and totaled $428 thousand, $582 thousand, and $786 thousand respectively.
Noninterest income increased 7.7% during the first three months of 2000
compared to the first three months of 1999. Income from fiduciary services
provided in the Bank's trust department remained strong, increasing 18.2%.
Noninterest expenses, excluding the provision for possible loan losses,
were 6.9% more in the first three months of 2000 than in the first three
months of 1999. The salaries of additional employees, at two more offices
than in the first quarter of 1999, contributed to this increase.
Net income was 15.2% higher for the first three months of 2000 compared
to the first three months of 1999. The increase in interest income was more
than the increase in interest cost. The increase in noninterest income, lower
additions to the allowance for possible loan losses, and tax savings, more
than offset the increase in noninterest expense.
<PAGE>
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date May 8, 2000 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date May 8, 2000 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 22,787
<INT-BEARING-DEPOSITS> 5
<FED-FUNDS-SOLD> 7,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,059
<INVESTMENTS-CARRYING> 128,787
<INVESTMENTS-MARKET> 125,998
<LOANS> 346,614
<ALLOWANCE> (4,931)
<TOTAL-ASSETS> 635,471
<DEPOSITS> 554,108
<SHORT-TERM> 603
<LIABILITIES-OTHER> 6,698
<LONG-TERM> 0
0
0
<COMMON> 29,200
<OTHER-SE> 44,862
<TOTAL-LIABILITIES-AND-EQUITY> 635,471
<INTEREST-LOAN> 7,322
<INTEREST-INVEST> 3,398
<INTEREST-OTHER> 143
<INTEREST-TOTAL> 10,863
<INTEREST-DEPOSIT> 4,980
<INTEREST-EXPENSE> 4,994
<INTEREST-INCOME-NET> 5,869
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,718
<INCOME-PRETAX> 2,791
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,034
<EPS-BASIC> 0.70
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.19
<LOANS-NON> 3,415
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,818
<CHARGE-OFFS> 150
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 4,931
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
