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 September 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
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 September 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 nine months ended September 30,
2000, are as follows:
Consolidated balance sheets - September 30, 2000, and December 31, 1999.
Consolidated statements of income - For the three months and nine months
ended September 30, 2000 and September 30, 1999.
Consolidated statements of cash flows - For the nine months ended
September 30, 2000 and September 30, 1999.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
______________________________________________________________________________________
<CAPTION>
September 30 December 31
(Dollars in Thousands) (Unaudited) 2000 1999
______________________________________________________________________________________
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 22,864 $ 23,404
Federal funds sold 10,400 2,300
Securities
Available for sale (amortized cost
$103,869 and $114,278 respectively) 102,472 111,870
Held to maturity (fair value $127,581
and $121,954 respectively) 128,533 124,410
_________ _________
Total securities 231,005 236,280
_________ _________
Loans, net of deferred fees 361,808 335,999
Allowance for possible loan losses (5,196) (4,818)
_________ _________
Net loans 356,612 331,181
_________ _________
Bank premises and equipment, at cost
less allowance for depreciation 8,270 8,306
Other assets 19,714 18,617
_________ _________
TOTAL ASSETS $ 648,865 $ 620,088
______________________________________________________________________________________
LIABILITIES Deposits
Noninterest-bearing $ 89,628 $ 78,454
Interest-bearing (including certificates
of deposit over $100,000: 2000 -
$55,761; 1999 $49,066) 472,431 462,362
_________ _________
Total deposits 562,059 540,816
_________ _________
Federal funds purchased and securities
sold under repurchase agreements 1,044 236
Dividends payable - 1,051
Other short term liabilities 741 733
Accounts payable and accrued liabilities 7,114 5,176
_________ _________
TOTAL LIABILITIES 570,958 548,012
________________________________________________________________________________________
STOCKHOLDERS' Common stock - $10 par value, 8,000,000
EQUITY shares authorized; issued and
outstanding - 2,920,000 29,200 29,200
Additional paid-in capital 4,320 4,320
Retained earnings 45,254 40,049
Accumulated other comprehensive income (867) (1,493)
_________ ____________
TOTAL STOCKHOLDERS' EQUITY 77,907 72,076
_________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 648,865 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C> <C>
INTEREST INCOME Interest and fees on loans $ 8,015 $ 7,044 $ 23,050 $ 20,893
_______ _______ ________ ________
Income on investment securities
Taxable interest 2,506 2,496 7,701 6,909
Exempt from federal income tax 764 708 2,259 2,156
Dividends 63 54 223 216
_______ _______ ________ ________
3,333 3,258 10,183 9,281
_______ _______ ________ ________
Other interest income 153 121 410 410
_______ _______ ________ ________
TOTAL INTEREST INCOME 11,501 10,423 33,643 30,584
______________________________________________________________________________________________________
INTEREST EXPENSE Interest on deposits 5,518 4,560 15,705 13,114
Interest on other short term
borrowings 29 8 87 23
_______ _______ ________ ________
TOTAL INTEREST EXPENSE 5,547 4,568 15,792 13,137
_______ _______ ________ ________
NET INTEREST INCOME 5,954 5,855 17,851 17,447
PROVISION FOR POSSIBLE LOAN LOSSES 225 200 675 1,475
_______ _______ ________ ________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,729 5,655 17,176 15,972
______________________________________________________________________________________________________
NONINTEREST INCOME Trust department income 439 398 1,371 1,249
Service fees on deposit accounts 1,513 1,069 3,852 3,065
Other service fees, commissions,
and fees 103 163 328 647
Other operating income 163 123 439 462
Securities gains - - - 130
______ _______ ________ _______
TOTAL NONINTEREST INCOME 2,218 1,753 5,990 5,553
______________________________________________________________________________________________________
NONINTEREST EXPENSES Salaries and employee benefits 2,458 2,197 7,348 6,444
Net occupancy expense 376 379 1,109 1,141
Furniture and equipment expense 297 318 901 937
Other operating expenses 1,698 1,582 4,964 4,916
______ _______ ________ _______
TOTAL NONINTEREST EXPENSES 4,829 4,476 14,322 13,438
______ _______ ________ _______
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,118 2,932 8,844 8,087
PROVISION FOR INCOME TAXES 946 911 2,559 2,366
______________________________________________________________________________________________________
NET INCOME $ 2,172 $ 2,021 $ 6,285 $ 5,721
______________________________________________________________________________________________________
EARNINGS PER SHARE Common stock
2,920,000 shares
outstanding 2000
2,904,615 shares
outstanding 1999 $ 0.74 $ 0.69 $ 2.15 $ 1.97
______________________________________________________________________________________________________
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
_________________________________________________________________________________________
<CAPTION>
(Dollars In Thousands) (Unaudited)
Nine Months Ended September 30, 2000 1999
<S> <C> <C> <C>
OPERATING Net income $ 6,285 $ 5,721
ACTIVITIES _________ _________
Adjustments to reconcile net income to net cash
provided by operating activities
Excess of provision for possible loan losses
over net charge offs 378 688
Provision for depreciation and amortization of
premises and equipment 836 867
Provision for depreciation of leased equipment 225 225
Amortization of intangibles 167 158
Amortization of investment security premiums,
net of accretion of discounts 502 682
Increase in cash surrender value of life insurance
contracts (177) (134)
Deferred income taxes (245) (367)
(Increase) decrease in
Interest receivable (749) (644)
Other assets (149) (52)
Increase (decrease) in
Interest payable 985 261
Other liabilities 1,140 371
_________ _________
Total Adjustments 2,913 2,055
_________ _________
Net cash provided by operating activities 9,198 7,776
_________________________________________________________________________________________
INVESTING Proceeds from maturities, calls, and sales of
ACTIVITIES available-for-sale securities 18,006 19,957
Proceeds from maturities and calls of held-to-maturity
securities 6,582 15,465
Purchases of investment securities
Available-for-sale (7,931) (36,969)
Held-to-maturity (10,874) (14,942)
Net increase in loans (25,809) (3,108)
Purchases of premises and equipment (800) (1,015)
Acquisition of other assets - 2,789
Purchase of single premium life insurance contracts (600) (920)
_________ ________
Net cash used by investing activities (21,424) (18,744)
_________________________________________________________________________________________
FINANCING Net increase in noninterest-bearing and
ACTIVITIES interest-bearing deposits 21,243 14,458
Net increase in short term borrowings 675 _
Cash dividends (2,132) (1,889)
--------- --------
Net cash provided by financing activities 19,786 12,570
_________________________________________________________________________________________
Increase in cash and cash equivalents 7,560 1,602
Cash and cash equivalents at beginning of period 25,704 33,155
_________ _________
Cash and cash equivalents at end of period $ 33,264 $ 34,757
_________________________________________________________________________________________
</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 6.8% in the first three
quarters of 2000 compared to a 7.5% increase in the first three
quarters of 1999. As a financial institution, the Bank's
primary earning asset is loans. At September 30, 2000, average
net loans had increased 8.4% and represented 54.0% 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 38.5% of average earning assets at
September 30, 2000, an increase of 4.7% in the first three
quarters of 2000. However, quarter end investments without fed
funds were down from 1999 year end as maturing investments were
used to fund loan growth. Average total assets were $637.8
million at the end of the first three quarters of 2000 compared
to $593.5 million at the end of the first three quarters of
1999. Period end assets were $648.9 million compared to $620.1
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 September 30, 2000, the Corporation's investment securities
portfolio had $102.5 million available-for-sale securities and
$128.5 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
<PAGE>
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 $26.8 million or 8.4% in the first nine months of 2000
compared to a $4.2 million or 1.3% decrease in the first nine
months of 1999. Commercial loans increased 16.6%, personal
loans decreased 6.2%, and loans secured by real estate posted a
13.9% growth for the first nine 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 loan relationships having an aggregate indebtedness of
$100 thousand or more for credit quality. This review is
supplemented by an independent third party review semiannually.
After the internal review during the first three quarters of
2000, loans totaling $4.1 million, 1.1% of the portfolio, were
recognized as other assets especially mentioned at September 30,
2000, which is up from the $3.4 million recognized at June 30,
2000, the $1.4 million recognized at March 31, 2000, and the
$1.0 million recognized at December 31, 1999. Loans totaling
$15.4 million, 4.3% of the portfolio, were classified as
substandard at September 30, 2000, which is a decrease compared
to the $16.3 million so classified at June 30, 2000, but an increase
compared to the $14.4 million so classified at March 31, 2000
and December 31, 1999. Loans totaling $.7 million, .2% of the
portfolio, were classified as doubtful at September 30, 2000,
which is a decrease from $1.7 million so classified at June 30,
2000, $1.9 million so classified at March 31, 2000, 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 without significant revisions.
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
$3.8 million, 1.1% of the total portfolio, were identified as
impaired at the end of the first nine months of 2000 compared to
$2.5 million at June 30, 2000, $4.6 million 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 September 30, 2000,
were $34.5 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.
<PAGE>
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.
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 quarters of 2000
reflecting a 5.8% growth compared to a 7.1% growth in the first
three quarters 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 1.7% growth
in average interest-bearing checking accounts, the 9.7% growth
in certificates of deposits under $100 thousand, and the 15.5%
growth in certificates of deposit over $100 thousand in the
first nine months of 2000. Savings deposits with limited
transactions increased 4.4% during the first nine 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 at favorable levels.
CAPITAL
Average shareholders' equity in the first three quarters of
2000 remained strong totaling $74.9 million at September 30,
2000, a 6.7% 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 September 30, 2000, the Corporation's
total risk-based and core capital ratios were 21.5% and 20.3% respectively.
The comparable ratios were 21.9% and 20.7% at year end, 1999. As of
September 30, 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 September 30, 2000, the Corporation and the Bank
had a ratio of core capital to average total assets of 12.0% and 11.8%
respectively, compared to 11.4% and 11.3% at December 31, 1999. Management
<PAGE>
believes, as of September 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.
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 September 30, 2000, additional
dividends of approximately $13.5 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 10.0% higher in the first nine
months of 2000 than the first nine months of 1999. Interest and
fees earned on loans increased 10.3% due to the increase in the
volume of average loans. Interest earned on investment
securities and other investments increased 9.3% compared to the
first nine months of 1999.
Total interest expense in the first nine months of 2000
compared to the first nine months of 1999 increased 20.2%. 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 September 30, 2000, 1999,
and December, 31, 1999 was 4.21%, 4.46%, 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
<PAGE>
portfolio and to determine the adequacy of the allowance for loans losses.
This review supported management's assertion that the allowance was
adequate at September 30, 2000. Additions to the allowance during the
first three quarters of 2000 were lower than the first three quarters of
1999 as reaffirmation of strong credit standards strengthened
portfolio quality. The allowance for possible loan and lease
losses was $5.2 million or 1.43% of gross loans at September 30,
2000 which compares to $4.8 million or 1.44% at September 30,
1999. Net charge offs at the end of the third quarter of 2000
were $277 thousand, an annualized net charge off ratio of .10%.
Earnings coverage of net charge offs was over 22.7 at September
30, 2000. Net charge offs at the end of the third quarter of
1999 were $787 thousand, an annualized net charge off ratio of
.32%. Earnings coverage of net charge offs was 7.3 at September
30, 1999. Non-performing loans as a percentage of the allowance
for possible loan and lease losses was 74.6% at the end of the
third quarter of 2000 compared to 54.3% at the end of the third
quarter of 1999.
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 nine 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 September 30, 2000, December 31, 1999,
and September 30, 1999, and totaled $498 thousand, $582
thousand, and $789 thousand respectively.
Noninterest income increased 7.9% during the first nine
months of 2000 compared to the first nine months of 1999.
Income from fiduciary services provided in the Bank's Trust
Department remained strong, increasing 9.7%. An internet
banking product has been tested by employees and will be offered
to our customers in the fourth quarter. A free checking and
overdraft privilege program introduced at the beginning of the
third quarter is generating additional fee income.
Noninterest expenses, excluding the provision for possible
loan losses, were 6.6% more in the first nine months of 2000
than in the first nine months of 1999. The salaries of
employees and occupancy expense related to additional offices
contributed to this increase.
Net income is 9.9% higher for the first nine months of 2000
compared to the first nine 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 and taxes not covered by
the increase in noninterest income.
<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 November 10, 2000 /s/ Waymon L. Hickman
___________________ ___________________________
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date November 10, 2000 /s/ Patricia N. McClanahan
___________________ ___________________________
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
