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 June 30, 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 of (I.R.S. Employer
in corporation 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 June 30, 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 six months ended June 30, 2000,
are as follows:
Consolidated balance sheets - June 30, 2000, and December 31, 1999.
Consolidated statements of income - For the three months and six months
ended June 30, 2000 and June 30, 1999.
Consolidated statements of cash flows - For the six months ended
June 30, 2000 and June 30, 1999.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
(Dollars in Thousands) (Unaudited) 2000 1999
______________________________________________________________________________
<S> <C> <C>
ASSETS Cash and due from banks $ 20,613 $ 23,404
Federal funds sold - 2,300
Securities
Available for sale (amortized
cost $106,896 and $114,278
respectively) 104,391 111,870
Held to maturity (fair value
$124,894 and $121,954
respectively) 127,151 124,410
_________ __________
Total securities 231,542 236,280
_________ __________
Loans, net of deferred fees 358,273 335,999
Allowance for possible
loan losses (5,067) (4,818)
_________ __________
Net loans 353,206 331,181
_________ __________
Bank premises and equipment,
at cost less allowance for
depreciation 8,200 8,306
Other assets 19,013 18,617
_________ __________
TOTAL ASSETS $ 632,574 $ 620,088
______________________________________________________________________________
LIABILITIES Deposits
Noninterest-bearing $ 75,757 $ 78,454
Interest-bearing (including
certificates of deposit over
$100,000: 2000 - $58,189;
1999 - $49,066) 470,921 462,362
_________ __________
Total deposits 546,678 540,816
_________ __________
Federal funds purchased and
securities sold under repurchase
agreements 3,002 236
Dividends payable 1,080 1,051
Other short term liabilities 750 733
Accounts payable and accrued
liabilities 6,016 5,176
_________ __________
TOTAL LIABILITIES 557,526 548,012
______________________________________________________________________________
STOCKHOLDERS' Common stock - $10 par value,
EQUITY 8,000,000 shares authorized;
2,920,000 shares issued
and outstanding - 29,200 29,200
Additional paid-in capital 4,320 4,320
Retained earnings 43,081 40,049
Accumulated other comprehensive
income (1,553) (1,493)
_________ ________
TOTAL STOCKHOLDERS'
EQUITY 75,048 72,076
_________ ________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 632,574 $ 620,088
</TABLE>
______________________________________________________________________________
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(Dollars In Thousands Except Per Share Data) Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C>
INTEREST INCOME Interest and fees on loans $ 7,713 $ 6,935 $ 15,035 $ 13,849
Income on investment
securities
Taxable interest 2,588 2,265 5,195 4,413
Exempt from federal
income tax 755 723 1,495 1,448
Dividends 109 111 160 162
_______ _______ ________ ________
3,452 3,099 6,850 6,023
_______ _______ ________ ________
Other interest income 114 175 257 289
_______ _______ ________ ________
TOTAL INTEREST INCOME 11,279 10,209 22,142 20,161
__________________________________________________________________________________________
INTEREST EXPENSE Interest on deposits 5,207 4,338 10,187 8,554
Interest on other short
term borrowings 44 6 58 15
_______ _______ ________ ________
TOTAL INTEREST EXPENSE 5,251 4,344 10,245 8,569
_______ _______ ________ ________
NET INTEREST INCOME 6,028 5,865 11,897 11,592
PROVISION FOR POSSIBLE
LOAN LOSSES 225 625 450 1,275
_______ _______ ________ ________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,803 5,240 11,447 10,317
________________________________________________________________________________
NONINTEREST INCOME Trust department income 454 446 932 851
Service fees on deposit
accounts 1,207 1,045 2,339 1,996
Other service fees,
commissions, and fees 135 249 225 484
Other operating income 111 199 276 339
Securities gains (losses) - 130 - 130
_______ ______ ______ ________
TOTAL NONINTEREST INCOME 1,907 2,069 3,772 3,800
________________________________________________________________________________
NONINTEREST EXPENSES Salaries and employee
benefits 2,454 2,176 4,890 4,247
Net occupancy expense 379 412 733 762
Furniture and equipment
expense 308 274 604 619
Other operating expenses 1,634 1,688 3,266 3,334
_______ ______ ______ ______
TOTAL NONINTEREST EXPENSES 4,775 4,550 9,493 8,962
_______ ______ ______ ______
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,935 2,759 5,726 5,155
PROVISION FOR INCOME TAXES 856 824 1,613 1,455
__________________________________________________________________________________________
NET INCOME $ 2,079 $ 1,935 $ 4,113 $ 3,700
__________________________________________________________________________________________
EARNINGS PER SHARE Common stock
2,920,000 shares
outstanding 2000
2,896,796 shares
outstanding 1999 $ 0.71 $ 0.66 $ 1.41 $ 1.28
__________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Dollars In Thousands) (Unaudited)
Six Months Ended June 30, 2000 1999
<S> <C> <C> <C>
OPERATING Net income $ 4,113 $ 3,700
ACTIVITIES Adjustments to reconcile net income to net
cash provided by operating activities
Excess (deficiency) of provision for
possible loan losses over net charge offs 249 647
Provision for depreciation and amortization
of premises and equipment 552 558
Provision for depreciation of leased
equipment 150 150
Amortization of deposit base intangibles 111 97
Amortization of investment security
premiums, net of accretion of discounts 372 437
Increase in cash surrender value of life
insurance contracts (116) (91)
Deferred income taxes (149) (321)
(Increase) decrease in
Interest receivable (220) (224)
Other assets 416 438
Increase (decrease) in
Interest payable 481 125
Other liabilities 553 188
________ ________
Total Adjustments 2,399 2,004
________ ________
Net cash provided by operating
activities 6,512 5,704
______________________________________________________________________________
INVESTING Proceeds from maturities, calls, and sales of
ACTIVITIES available-for-sale securities 13,004 14,155
Proceeds from maturities and calls of
held-to-maturity securities 4,760 13,405
Purchases of investment securities
Available-for-sale (5,861) (36,903)
Held-to-maturity (7,634) (12,521)
Net (increase) decrease in loans (22,273) 4,654
Purchases of premises and equipment (446) (559)
Acquisition of other assets - 2,789
Purchase of single premium life insurance
contracts (600) -
_________ ________
(19,050) (14,980)
_______________________________________________________________________________
FINANCING Net increase in noninterest-bearing and
ACTIVITIES interest-bearing deposits 5,862 (7,005)
Net increase (decrease) in short term
borrowings 2,636 3,800
Cash dividends (1,051) (896)
________ ________
Net cash provided by financing
activities 7,447 (4,101)
_______________________________________________________________________________
Increase (decrease) in cash and cash
equivalents (5,091) (13,377)
Cash and cash equivalents at beginning of
period 25,704 33,155
________ _______
Cash and cash equivalents at end of period $ 20,613 $ 19,778
______________________________________________________________________________
</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 6.4% in the first half of
2000 compared to a 6.1% increase in the first half of 1999. As
a financial institution, the Bank's primary earning asset is
loans. At June 30, 2000, average net loans had increased 7.1%
and represented 58.0% 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 42.0% of average earning assets at June 30, 2000, an
increase of 5.5% in the first half of 2000. However, quarter
end investments were down from 1999 year end as maturing
investments were used to fund loan growth. Average total assets
were $635 million at the end of the first half of 2000 compared
to $586 million at the end of the first half of 1999.
Period-end assets were $633 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 June 30, 2000, the Corporation's investment securities
portfolio had $104.4 million available-for-sale securities and
$127.2 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
<PAGE>
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
average loan portfolio increased $22.6 million or 7.1% in the
first six months of 2000 compared to a $5.6 million or 1.8%
decrease in the first six months of 1999. Commercial loans
increased 7.7%, personal loans decreased 2.7%, and loans secured
by real estate posted a 9.2% growth for the first six 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 for credit quality. After this review during
the first half of 2000, loans totaling $3.4 million, .94% of the
portfolio, were recognized as other assets especially mentioned
at June 30, 2000, which is up from the $1.4 million recognized
at March 31, 2000 and $1.0 million at December 31, 1999. Loans
totaling $16.2 million, 4.5% of the portfolio, were classified
as substandard at June 30, 2000, which is an increase compared
to $14.4 million so classified at March 31, 2000 and December
31, 1999. Loans totaling $1.6 million, .5% of the portfolio,
were classified as doubtful at June 30, 2000, which is a
decrease from $1.9 million so classified at March 31, 1999, and
$1.8 million at December 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. During the
second quarter of 2000, a normal safety and soundness
examination was conducted by the Office of the Comptroller of
the Currency. These loan classifications of management were
reviewed during this examination. 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 $2.5 million, .7% of the total
portfolio, were identified as impaired at the end of the first
six months of 2000 compared to $4.6 milllion at March 31, 2000,
and $3.7 million at December 31, 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 June 30, 2000, were
$31.9 million and $2.5 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 half of 2000 reflecting
a 5.6% growth which is almost the same as the first half of
1999. Short and medium term rates were less competitive
compared to longer term rates in response to an Asset/Liability
Committee strategy to lengthen deposit maturities. This was a
contributing factor to the 3.1% growth in average
interest-bearing checking accounts, the 8.0% growth in
certificates of deposits under $100 thousand, and the 11.9%
growth in certificates of deposit over $100 thousand in the
first six months of 2000. Savings deposits with limited
transactions increased 6.1% during the first six months of 2000.
Savings deposits have been strong historically providing a
core, low cost, source of funding. Noninteresting bearing
deposits, also known as regular demand deposits, represent 14.0%
of total deposits. This historical trend has contributed to the
maintenance of deposits costs.
CAPITAL
Average shareholders' equity in the first half of 2000
remained strong totaling $73.9 million at June 30, 2000, a 5.4%
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 average 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 varying amounts of the Allowance for
Possible Loan Losses. As of June 30, 2000, the Corporation's
total risk-based and core capital ratios were 21.4% and 20.1%
respectively. The comparable ratios were 22.0% and 20.7% at
year end, 1999. As of June 30, 2000, the Bank's total
risk-based and core capital ratios were 21.2% and 19.9%
respectively. The comparable ratios were 21.7% and 20.5% at
year end, 1999. As of June 30, 2000, the Corporation and the
Bank had a ratio of core capital to average total assets of
11.6% and 11.5% respectively, compared to 11.4% and 11.3% at
December 31, 1999. Management believes, as of June 30, 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.
<PAGE>
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 of
the preceding two years. As of June 30, 2000, additional
dividends of approximately $11.3 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 9.8% higher in the first six
months of 2000 than the first six months of 1999. Interest and
fees earned on loans increased 8.6% due to the increase in the
volume of average loans. Interest earned on investment
securities and other investments increased 12.6% compared to the
first six months of 1999.
Total interest expense in the first six months of 2000
compared to the first six months of 1999 increased 19.6%. The
total cost of interest-bearing deposits has increased all year
as interest rates have increased. 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 June 30, 2000, 1999, and
December, 31, 1999 was 4.23%, 4.51%, 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 June 30, 2000. Additions to the
allowance during the first half of 2000 were lower than the
first half of 1999. The allowance for possible loan and lease
losses was $5.1 million or 1.41% of gross loans at June 30, 2000
which
<PAGE>
compares to $4.7 million or 1.47% at June 30, 1999. Net charge
offs at the end of the second quarter of 2000 were $201
thousand, an annualized net charge off ratio of .12%. Earnings
coverage of net charge offs was over 20.5% at June 30, 2000.
Net charge offs at the end of the second quarter of 1999 were
$628 thousand, an annualized net charge off ratio of .40%.
Earnings coverage of net charge offs was just over 5.9% at June
30, 1999. Non-performing loans as a percentage of the allowance
for possible loan and lease losses was 50.2% at the end of the
second quarter of 2000 compared to 62.0% at the end of the
second 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 half 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 June 30, 2000, December 31, 1999, and
June 30, 1999, and totaled $447 thousand, $582 thousand, and
$753 thousand respectively.
Noninterest income decreased .7% during the first six
months of 2000 compared to the first six months of 1999.
Income from fiduciary services provided in the Bank's Trust
Department remained strong, increasing 9.6%. An internet
banking product is being tested by employees and will be offered
to our customers in the latter part of the third quarter.
Noninterest expenses, excluding the provision for possible
loan losses, were 5.9% more in the first six months of 2000 than
in the first six months of 1999. The salaries of employees and
occupancy expense related to additional offices contributed to
this increase.
Net income is 11.2% higher for the first six months of
2000 compared to the first six months of 1999. The increase in
interest income was more than the increase in interest cost.
Lower additions to the allowance for possible loan losses offset
the increase in noninterest expenses not covered by noninterest
income and the increase in taxes.
<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 August 8, 2000 /s/ Waymon L. Hickman
______________ _________________
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date August 8, 2000 /s/ Patricia N. McClanahan
______________ ______________________
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
