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, 2001

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 1, 2002, was $198,560,000.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the issuer's common stock, as of March 1, 2002. 2,920,000 shares
This filing contains 84 pages.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Proxy Statement for 2001 Annual Stockholders Meeting of April 16, 2002. -- Parts I and III

(2) Annual Report to Stockholders for Year Ended December 31, 2001. -- Parts I and II

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 seventy one (271) 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, 2001, 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 Highway 31, (2) forty nine improved lots in a residential subdivision on Weakley Creek Road in Lawrenceburg, Lawrence County, Tennessee, and (3) a commercial property in the industrial park in Columbia, Maury County, 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 stockholder of the Corporation and the Bank 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, 2001.

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 16, 2002.

Executive Officers of Registrant

The following is a list as of March 1, 2002, 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 
67
None 
Chairman of the Board, Chief Executive Officer, and Director of FFMC. Chairman of the Board, Chief Executive Officer, and Director of the Bank. Employed in 1958. Named Assistant Cashier in 1959. Named Assistant Vice-President in 1961, and promoted to Vice-President in 1962. Elected Director in 1967 and First Vice-President and Trust Officer in 1969. Promoted in 1973 to Executive Vice-President and Senior Trust Officer. Elected President of Bank and Chief Administrative Officer in August 1980. Elected President of FFMC in April, 1982. Elected Chief Executive Officer of the Bank in December, 1990. Elected Chairman of the Board of Directors of the Bank effective December 31, 1995.
T. Randy Stevens 
50
None
President, Chief Operating Officer, and Director of FFMC. President, Chief Operating Officer, and Director of the Bank. Employed in 1973. Promoted to Commercial Bank Officer in 1974. Promoted to Assistant Vice President in 1976. Promoted to Vice President in 1979. Became Vice President and Trust Officer in 1982. Promoted to First Vice President in 1984. Promoted to Executive Vice President and Chief Administrative Officer in 1990. Elected as Director of the Bank in 1991 and Director and Vice President of FFMC in 1991. Elected President and Chief Operating Officer of the Bank effective December 31, 1995. Elected President and Chief Operating Officer of FFMC in April, 1996.
 

Executive Officers of Registrant-Continued

 
 
Family
Positions and
Name
Age
Relationship
Offices Held
John P. Tomlinson, III 
51
None 
Senior Executive Vice President and Director of FFMC and the Bank. Employed in 1973. Promoted to Commercial Bank Officer in 1974. Named Assistant Vice President in 1976. Promoted to Vice President in 1979. Named Manager of Mortgage Lending in 1986. Promoted to Senior Vice President in 1990. Promoted to Executive Vice President in 1995. Elected Secretary of FFMC in April, 1996. Named Vice President of FFMC December 17, 1996. Promoted to Senior Executive Vice President of the Bank in 1998. Named Senior Executive Vice President of FFMC in 1999. Elected Director of FFMC and Bank in 2000.
Martha M. McKennon 
57
None
Secretary of FFMC. Vice President, Executive Assistant, Secretary to the Board of the Bank. Employed in 1974. Promoted to Customer Service Representative in 1980. Named Executive Assistant in 1984. Promoted to Assistant Vice President/Executive Assistant in 1991. Named Assistant Secretary of FFMC December 17, 1996. Promoted to Vice President/Executive Assistant in 1997. Named Secretary to FFMC in 1999. Named Secretary to Bank Board in 2000.
Patricia N. McClanahan
57
None
Treasurer of FFMC. Senior Vice President and Chief Financial Officer/Cashier of the Bank. 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.

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.

 

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:

(iii) Audit Committee Charter

(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.

 

 

 

 

 

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST FARMERS AND MERCHANTS CORPORATION

 
BY /s/ Waymon L. Hickman 
Waymon L. Hickman,
Chairman of the Board and Chief Executive Officer
(Chairman of the Board and Chief Executive Officer of the Bank)
 
 
Date March 19, 2002 
 
 
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 / T. Randy Stevens 
T. Randy Stevens, 
President and Chief Operating Officer
(President and Chief Operating Officer of the Bank)
 
 
Date March 19, 2002 
 
 
/s / Patricia N. McClanahan 
Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
 
 
Date March 19, 2002 

Signatures -- continued

/s/ Kenneth A. Abercrombie 
/s/ O. Rebecca Hawkins ____ ____ 
Kenneth A. Abercrombie, Director
O. Rebecca Hawkins, Director
 
 
Date March 19, 2002 ___
Date March 19, 2002 
 
 
James L. Bailey, Jr., Director 
/s/ Waymon L. Hickman 
/s/ James L. Bailey, Jr. 
Waymon L. Hickman, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ Flavius A. Barker __ 
/s/ Joseph W. Remke, III ______ 
Flavius A. Barker, Director 
Joseph W. Remke, III, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ Hulet M. Chaney 
/s/ T. Randy Stevens 
Hulet M. Chaney, Director 
T. Randy Stevens, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ H. Terry Cook, Jr. 
/s/ John P. Tomlinson, III _______ 
H. Terry Cook, Jr., Director 
John P. Tomlinson, III, Director 
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ W. J. Davis, Jr. 
/s/ Dan C. Wheeler 
W. J. Davis, Jr., Director 
Dan C. Wheeler, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ Tom Napier Gordon 
/s/ David I. Wise ________ 
Tom Napier Gordon, Director 
David I. Wise, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 
 
/s/ Edwin W. Halliday ___ 
/s/ W. Donald Wright ______ 
Edwin W. Halliday, Director 
W. Donald Wright, Director
 
 
Date March 19, 2002 
Date March 19, 2002 
 

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, 2001

FIRST FARMERS AND MERCHANTS CORPORATION

COLUMBIA, TENNESSEE

FORM 10-K -- ITEM 14(a)(1) and (2)

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

The following consolidated financial statements of First Farmers and Merchants Corporation and Subsidiary, included in the annual report of the registrant to its security holders for the year ended December 31, 2001, are incorporated by reference in Item 8:

Consolidated balance sheets -- December 31, 2001 and 2000

Consolidated statements of income -- Years ended December 31, 2001, 2000, and 1999

Consolidated statements of changes in equity -- Years ended December 31, 2001, 2000, and 1999

Consolidated statements of cash flows -- Years ended December 31, 2001, 2000, and 1999

Notes to consolidated financial statements -- December 31, 2001

The following financial statement schedules of First Farmers and Merchants Corporation and Subsidiary are included in Item 14(d):

None

All other schedules to the consolidated financial statements required by Article 9 of Regulation S-X and all other schedules to the financial statements of the registrant required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore, have been omitted.

 

EXHIBIT INDEX

FIRST FARMERS AND MERCHANTS CORPORATION

 

Exhibit Number Title or Description

 

(iii) Audit Committee Charter

(13) Annual Report to Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT iii

AUDIT COMMITTEE CHARTER

FIRST FARMERS AND MERCHANTS CORPORATION
**First Farmers and Merchants National Bank

Charter and Powers of the Audit Committee

The Board of Directors of First Farmers and Merchants National Bank ("FF&M") establishes an Audit/Compliance/CRA Committee ("committee") with authority, responsibility and specific duties as described below.

Composition

The committee shall be comprised of a minimum of three outside directors who are independent of management and are free of any relationship that, in the opinion of the Board of Directors ("the Board"), would interfere with their exercise of independent judgment as a committee member. The determination of independence will be made in accordance with the provisions of Section 36 of FDICIA and any other requirements as may be promulgated from time to time by those regulatory agencies or other authorities applicable to the governance of FF&M.

The members of the committee shall be financially literate either at the time of appointment to the committee, or within a reasonable period of time thereafter. At least one member of the committee should have accounting or related financial management expertise.

One of the members shall be appointed committee chairman by the chairman of the Board. 

Responsibility

The Audit Committee has a major responsibility to provide assistance to the Board in fulfilling their fiduciary responsibility to the shareholders and investment community related to accounting and reporting practices; the quality and integrity of financial reports; and the quality and effective administration of loan portfolios.

The committee is to be the Board's principal agent in ensuring the independence of the corporation's outside external auditors and internal auditors, the integrity of management, and the adequacy of disclosures to stockholders. It is the intention of the Board to adhere to the Securities and Exchange Commission's ("SEC") rule regarding Audit Committee Disclosure that became effective January 31, 2000.

The Audit Committee is also responsible for overseeing that management has established and maintained processes to assure that an adequate system of internal controls is in place and functioning as designed within FF&M. In addition, the committee will oversee that management has established and maintained processes to assure compliance with all applicable laws, regulations and corporate policies. In so doing, the Audit Committee will be responsible for handling relations with the outside external auditing firm, and the Internal Audit and Loan Review functions. 
The committee will ensure that its members receive an appropriate degree of education and training in order to maintain an adequate level of expertise necessary to discharge their responsibilities on an ongoing basis.

Authority

The Audit Committee may be requested by the Board to investigate any activity of FF&M, and all employees are directed to cooperate as requested by members of the committee. The committee is empowered to retain persons having special competence as necessary to assist the committee in fulfilling its responsibility.

The committee views the outside independent auditors, Internal Audit and Loan Review as important resources. To this end, the Audit Committee should concur in the appointment or removal of the independent auditors, the Internal Auditors and the Loan Review. However, the opportunity for the independent auditors and Internal Auditors to meet with the entire Board of Directors as needed is not to be restricted.

To the extent necessary to fulfill its primary responsibilities, the committee will also communicate with the corporate legal counsel, the Accounting Department, Credit Administration, and others, as it deems necessary.

Frequency of Meetings

The Audit Committee shall meet as often as deemed necessary in order to fulfill its responsibilities, but not less than quarterly. 

Attendance at Meetings

In addition to the members of the Audit Committee, the chairman of the Audit Committee may request members of management, the internal auditors and representatives of the independent auditors be present at meetings of the committee, as deemed appropriate.

Agenda for Meetings

In carrying out their responsibilities, the committee's agenda and procedures should remain flexible in order that it can best react to changing conditions and environment and to assure the Board and Shareholders that the accounting and reporting practices of FF&M and subsidiaries are in accordance with all requirements and are of the highest quality.

The committee's agenda on an annual basis will include the following:
- Provide an open avenue of communication between the outside auditors, the Internal Auditors, and the Board of Directors.
- Confirm and assure the independence of the outside and internal auditors.
- Review coordination of audit efforts between the outside and internal auditors to assure completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.
- Meet periodically with the outside and internal auditors and Manager of Loan Review without members of management present. 
- Review and approve the scope and general extent of the audit examination performed by the external auditors, including their engagement letter. The auditors' fees are to be arranged by management and annually summarized for committee review and approval.
- Review any other services rendered by the external audit firm for FF&M.
- Review with the external auditors the adequacy and effectiveness of internal auditing, control of the organization, recommendations for improvement in control, and any difficulties encountered.
- Arrange for the independent external auditors to review the following items with the Audit Committee:
- FF&M's annual report to shareholders and Forms 10K and 10Q, including the financial statements, and financial statement and supplemental disclosures required by generally accepted accounting principles and the SEC.
- Significant transactions, if any, not a normal part of FF&M's operations.
- Changes (pending or proposed), if any, during the year in FF&M's accounting principles or their application.
- Significant adjustments, if any, not a normal part of FF&M's operations.
- The independent auditors should be instructed to communicate with the chairman of the Audit Committee if there is a probability that a pending quarterly review report, if any, will be other than standard.
- Inquire of the independent auditors whether there have been any disagreements with management, which if not satisfactorily resolved, would have caused them to modify their report on FF&M's financial statements.
- Ascertain that the outside auditors understand that:
- The Audit Committee is the outside auditors' client;
- The outside auditors are required to provide a timely analysis of current financial reporting issues and practices;
- The outside auditors are required to discuss their qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and the degree of aggressiveness or conservativeness of principles and estimates.

- Evaluate the cooperation received by the outside auditors during their audit examination, including their access to all requested records, data and information.
- Elicit the comments of management regarding the responsiveness of the outside auditors to FF&M's needs.
- Review and approve the annual audit plan, including their engagement letter, prepared by the Internal Auditors.
- Review and approve the status of completion of and significant changes to the Internal Audit annual plan and budget.
- Evaluate internal accounting control through a review of reports prepared by the Internal Auditors that describe control weaknesses, and determine that appropriate corrective action is being taken by management.
- Review the Internal Auditors' compliance with the Institute of Internal Auditor's Standards for the Professional Practice of Internal Accounting.
- Review the organizational structure and qualifications of the Internal Auditors.
- Review and approve the loan review policy and operating plan of the Loan Review function.
- Review and approve the status of completion of and significant changes to the Loan Review plan and budget.
- Evaluate asset quality and credit administration through a review of reports prepared by the Loan Review function that evaluate asset quality, the adequacy of allowance for loan losses, and management of the loan portfolios of FF&M.
- Review all reports of examination issued by FF&M's regulators.
- Make or cause to be made, all necessary inquiries of management and the independent auditors concerning established standards of corporate conduct and performance, and deviations therefrom. Legal matters, regulatory and legal requirements and issues, and insurance concerns, which could significantly impact the financial statements, should also be reported.
- Discuss with FF&M's management the scope and quality of internal accounting and financial reporting controls in effect.
- Review with FF&M's management, internal auditors and independent auditors, FF&M's policies and procedures to reasonably ensure the adequacy of internal accounting and financial reporting controls.
- Inquire of management, the outside auditors and internal audit about significant risks or exposures and assess steps management has taken to minimize risks.
- Apprise the Board of significant developments in the course of performing the above duties.
- Prepare a written report that describes the Audit Committee's composition and responsibilities and how they were discharged.
- Review, update and approve the Audit Committee charter annually.
- Recommend to the Board any appropriate extensions or changes in the duties of the committee.

Committee Communications

Minutes of each meeting shall be prepared with copies to be provided to members of the committee and made available to management, the independent auditors, Internal Auditors and regulatory examiners. 

The chairman of the Audit Committee shall make a report to the Board on the results of each meeting of the Audit Committee.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT 13

ANNUAL REPORT TO STOCKHOLDERS

FIRST FARMERS AND MERCHANTS CORPORATION
**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, 2001, the only subsidiary of the Corporation was First Farmers and Merchants National Bank (the Bank). The Bank owns one hundred percent of F & M West, a Nevada subsidiary that provides advisory service for management of the Bank's investment portfolio. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. 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, Ellington, Downtown Lewisburg, Lewisburg West, and Chapel Hill. Offices in Hickman County include Centerville and East Hickman. In Dickson County, there is an office in White Bluff. 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. The financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.

During 2001, First Farmers and Merchants National Bank posted a 36.8% increase in net loans , over 80% of which was related to loans acquired in the acquisition of the Peoples & Union Bank of Lewisburg, Tennessee. This acquisition made the Bank the largest independent bank in Tennessee. Deposits grew almost 30%, 89% of which was related to deposits acquired in Lewisburg. Net income was up 27.5%. During the last quarter of 2001, the Bank announced the pending acquisition of two offices of Community Bank, an Alabama banking corporation in Pulaski, Giles County, Tennessee. The regulatory approval process was well under way at the end of 2001. The Bank is committed to providing 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 2001, 2000, and 1999; 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 nineteen (19) other banks, two (2) savings and loan associations, and several credit unions located in its 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 $10.6 million for 2001 compared to $8.3 million in 2000 and $7.5 million in 1999. On a per common share basis, net income was $3.63 for 2001 versus $2.85 for 2000 and $2.59 for 1999. The improvement in 2001's earnings resulted from an increase in interest income that more than covered the cost of funds. Noninterest income was up covering half the increase in noninterest expenses. Additions to the allowance for loan losses and taxes both showed an increase. 

The return on beginning equity for 2001 was 13.29% compared to 11.55% for 2000 and 11.98% for 1999. The return on average assets was 1.36% for 2001 versus 1.30% for 2000 and 1.25% for 1999.
**Net Interest Margin

The net 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 net 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. 

<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

** 
 
 
 
 
 
 
 
 
 
YEAR ENDED DECEMBER 31,
 
 
 
 
 
 
 
 
2001
2000
1999
Average
Rate/
Average
Rate/
Average
Rate/
Balance
Yield
Interest
Balance
Yield
Interest
Balance
Yield
Interest
ASSETS
(Dollars In Thousands)
Interest earning assets
Loans, net
$
462,725
8.49
%
$
39,272
*
$
349,727
8.99
%
$
31,432
*
$
318,868
8.8
%
$
28,054
*
Bank deposits
625
6.56
41
626
6.55
41
22
4.55
1
Taxable securities
172,929
6.1
10,556
170,972
6.1
10,430
163,455
6
9,809
Tax exempt securities
69,926
6.34
4,430
*
64,077
6.31
4,042
*
58,956
6.47
3,814
*
Federal funds sold
8,238
3.87
319
8,918
6.25
557
12,105
5.11
619
TOTAL EARNING ASSETS
714,443
7.64
$
54,618
594,320
7.82
$
46,502
553,406
7.64
$
42,297
Noninterest earning assets
Cash and due from banks
24,509
21,578
22,522
Bank premises and equipment
9,762
8,262
8,139
Other assets
30,141
16,636
16,790
TOTAL ASSETS
$
778,855
$
640,796
$
600,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts 
$
195,476
2.13
%
$
4,154
$
183,054
3.18
%
$
5,815
$
180,838
3.06
%
$
5,537
Savings
64,687
2.76
1,783
58,218
3.12
1,814
56,519
3.12
1,761
Time
231,370
5.5
12,724
182,979
5.79
10,599
164,359
5
8,218
Time over $100,000
92,450
5.49
5,077
54,057
6.03
3,258
46,593
5.16
2,402
TOTAL INTEREST BEARING DEPOSITS
583,983
4.06
23,738
478,308
4.49
21,486
448,309
4
17,918
Federal funds purchased and securities
sold under agreements to repurchase
3,401
3.47
118
1,297
6.09
79
127
4.72
6
Other short-term debt
648
4.48
29
624
6.09
38
549
4.74
26
TOTAL INTEREST BEARING LIABILITIES
588,032
4.06
$
23,885
480,229
4.5
$
21,603
448,985
4
$
17,950
Noninterest bearing liabilities
Demand deposits
96,369
78,077
75,956
Other liabilities
8,215
6,471
5,755
TOTAL LIABILITIES
692,616
564,777
530,696
Stockholders' equity
86,239
76,019
70,161
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY
$
778,855
$
640,796
$
600,857
Spread between combined rates earned and
combined rates paid*
3.58
%
3.32
%
3.64
%*** Taxable equivalent basis

Notes:

1.
U.S. Government, government agency, and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities. Municipal debt securities are nontaxable and classified as held- to- maturity.
 
 
2.
The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax free assets. Loans include nonaccrual loans for all years presented.
 
 
3.
The average balances of the amortized cost of available-for- sale securities were used in the calculations in this table.
<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
___________________________________________________________________________________________________________

Management activities are planned to maintain a satisfactory spread between the yields on earning assets and the related cost of interest-bearing funds. The gross interest spread is determined by comparing the taxable equivalent gross interest margin to average earning assets before deducting the allowance for loan losses. This ratio reflects the overall profitability of earning assets, including both those funded by interest-bearing sources and those which incur no interest cost (primarily noninterest-bearing demand deposits). This ratio is most often used when analyzing a banking institution's overall gross margin profitability compared to that of other financial institutions. The incremental interest spread compares the difference between the yields on earning assets and the cost of interest-bearing funds. This calculation and similar ratios are used to assist in pricing decisions for interest related products. Table A entitled Distribution of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential presents for each of the last three years by major categories of assets and liabilities, the average daily balances, the components of the gross interest margin (on a taxable equivalent basis), the yield or rate, and the incremental and gross interest spread.

__________________________________________________________________________________________

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)

2001 Compared to 2000
2000 Compared to 1999
Yield/
Net Increase
Yield/
Net Increase
Volume
Rate
(Decrease)
Volume
Rate
(Decrease)**Revenue earned on
Loans, net
$
10,158 
$ 
(2,318)
$ 
7,840 
$ 
2,716 
$ 
662 
$ 
3,378 
Bank deposits
- 
- 
- 
27 
13 
40 
Investment securities
Taxable securities
119 
7 
126 
451 
170 
621 
Tax-free securities
369 
19 
388 
331 
(103)
228 
Federal funds sold
(42)
(196)
(238)
(163)
101 
(62)
Total interest earning assets
10,604 
(2,488)
8,116 
3,362 
843 
4,205 **Interest paid on
NOW and money market accounts
395 
(2,056)
(1,661)
68 
210 
278 
Savings deposits
202 
(233)
(31)
53 
- 
53 
Time deposits
2,803 
(678)
2,125 
931 
1,450 
2,381 
Time deposits over $100,000
2,313 
(494)
1,819 
385 
471 
856 
Federal funds purchased and securities
sold under agreements to repurchase
128 
(89)
39 
55 
18 
73 
Short term debt
1 
(10)
(9)
3 
9 
12 
Total interest-bearing funds
5,842 
(3,560)
2,282 
1,495 
2,158 
3,653 **Net interest earnings
$
4,762 
$ 
1,072 
$ 
5,834 
 
$ 
1,867 
$ 
(1,315)
$ 
552 
Notes:

1.
The change in interest resulting from both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the relationship of the absolute dollar amounts of the change in each.
2.
The computation of the taxable equivalent adjustment has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.
3.
U.S. Government, government agency, and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities. Municipal debt securities are nontaxable and classified as held-to-maturity.
<PAGE>

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.

**AVERAGE EARNING ASSETS
(In Thousands $)
 
Loans
Securities
Other
1999
318,868
222,411
12,127
2000
349,727
235,049
9,544
2001
462,725
242,855
8,863

 

Average earning assets increased 20.2% in 2001 compared to an 7.4% increase in 2000 and a 8.9% increase in 1999. The acquisition in the second quarter of 2001 is the reason for the large increase in 2001. As a financial institution, the Bank's primary earning asset is loans. At December 31, 2001, average net loans represented 65% of average earning assets. Average net loans were up 32.3% in 2001, 80% of which was a result of the acquisition, compared to a 9.7% increase in 2000. Net loans declined three quarters of a percentage point from 1998 to 1999. Average investments, including federal funds sold, made up the remaining balance of average earning assets at December 31, 2001, increasing 2.9% from year end 2000 compared to a 4.3% increase at the end of 2000 from year end 1999, and a 25.5% increase at the end of 1999 from year end 1998. The acquisition contributed to the increase in 2001 while the decline in investments in 2000 is due to the increase in loans. The Bank completed an acquisition of Peoples and Union Bank of Lewisburg, Tennessee, in the second quarter of 2001 acquiring $111 million in net loans, $19 million in investment securities, and certain other assets. Average total assets increased during the last three years as evidenced by a 21.5% growth during 2001, 65% relates to the acquisition, a 6.7% growth during 2000, and an 8.7% growth from 1998 to 1999.

**AVERAGE FUNDING OF EARNING ASSETS
(Thousands $)
 
Interest-Bearing Deposits
Noninterest-Bearing Deposits
Other
1999
448,309
75,956
6,431
2000
478,308
78,077
8,392
2001
583,983
96,369
12,264

The bank's average deposits grew during the last three years reflecting a 22.3% during 2001, 79% of this growth is related to the acquisition. Deposit liabilities of $148 million were assumed in the transaction. Deposits experienced a 6.1% growth from 1999 to 2000, and an 8.5% growth from 1998 to 1999. Interest rates declined sharply in 2001. Some customers moved money to interest-bearing transaction accounts until rates settled down. Interest-bearing transaction accounts increased 6.8% during 2001 compared to a 1.2% increase in 2000 and a 2.8% increase during 1999. Time deposits under $100,000 increased 26.4% during 2001. Time deposits over $100,000 increased 71.0% in 2001. This large increase is related to the acquisition. Average savings deposits increased over 11.0% during 2001. Savings deposits have been strong historically providing a core, low cost, source of funding. However, the acquisition contributed to this increase. The Bank's noninterest-bearing deposits have remained consistently strong and were 14.2% of average total deposits in 2001, 14.0% in 2000, and 14.3% in 1999. This strong core of noninterest-bearing funds contributed to the maintenance of the low cost of funds for the periods.
 

 
**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 uses a formal asset and liability management process to ensure adequate liquidity and control interest rate risk. The goal of liquidity management is to provide adequate funds to meet loan demand and any potential unexpected deposit withdrawals. This goal is accomplished by consistent core deposit growth, holding adequate liquid assets in the form of securities, and maintaining unused capacity to borrow funds. The objective of interest rate risk management is 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.
**Liquidity

At December 31, 2001, the Bank had approximately $70.9 million of cash and due from banks, securities and other short-term investments maturing within one year compared to $59.8 million as of a year earlier. In the normal course of business, the Bank has established lines of credit for short-term borrowings for the management of daily liquidity needs. At December 31, 2001, the unused lines of credit were $35 million.
**Interest Rate Risk

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 committee measures near-term (next twelve months) risk to net interest income due to changes in interest rates. The model incorporates the Bank's assets and liabilities, together with forecasted changes in the balance sheet mix and assumptions that reflect the current interest rate environment to simulate the effect of possible changes in interest rates on net interest income. 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 4.5% of net interest income given a three hundred basis point shift in interest rates is considered an acceptable rate risk position. At December 31, 2001, if interest rates were to rise 300 basis points (3.0%) over the next twelve months, net interest income would be $857 thousand less than currently projected without interest rate movements. This would be a decline in net interest income of 2.4% which is within policy guidelines established by the Board of Directors.

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, 2001, 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). TABLE A - Distribution of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential provides details of the largest component of interest-bearing liabilities.

The net interest margin, on a tax equivalent basis, at December 31, 2001, 2000, and 1999 was 4.30%, 4.19%, and 4.40% respectively.

 
** 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
____________________________________________________________________________________________

**TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities**
(Dollars in Thousands) 
3 Months 
3-6 
6-12 
Over 1 **As of December 31, 2001 
or Less 
Months 
Months 
Year 
Total 
Earning assets 
 
 
 
 
 
Bank time deposits **$ 
-
$ 
-
$ 
-
$ 
16 
$ 
16 
Taxable investment securities 
6,081 
11,149 
18,132 
133,995 
169,357 
Tax-exempt investment securities 
1,206 
1,320 
1,380 
67,189 
71,095 
Loans and leases, net of deferred fees 
94,182 
61,453 
190,966 
168,577 
515,178 
 
 
 
 
 
Total earning assets 
101,469 
73,922 
210,478 
369,777 
755,646 
Interest-bearing liabilities ** 
 
 
 
 
 
 
 
 
 
NOW and money market accounts 
56,140 
- 
97,264 
49,585 
202,989 
Savings 
- 
- 
72,994 
- 
72,994 
Time 
67,606 
59,974 
70,682 
37,568 
235,830 
Time over $100,000 
29,858 
32,042 
22,932 
13,440 
98,272 
Other short-term debt 
708 
- 
- 
- 
708 
 
 
 
 
 
Total interest bearing liabilities 
154,312 
92,016 
263,872 
100,593 
610,793 
 
 
 
 
 
Period gap 
(52,843)
(18,094)
(53,394)
269,184 
$ 
144,853 
 
 
 
 
 
 
 
 
 
 
 
Cummulative gap **$ 
(52,843)
$ 
(70,937)
$ 
(124,331)
$ 
144,853 
______________________________________________________________________________________ Available-for-sale and held-to-maturity securities were combined in the taxable securities category for purposes of this table.**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.

The lending activities of the Bank are subject to written underwriting standards and policies established by the Bank's Board of Directors and management which include loan review procedures and approvals. Applications for loans are taken by designated employees at seventeen of the Bank's offices. 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.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
______________________________________________________________________________
**LOANS AND LOAN QUALITY (Continued)

The Bank 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 review process also includes semiannual reviews by an outside party to assess the quality of the loan portfolio independently. Management has concluded that this independent review has served to strengthen underwriting practices. The Credit Administrator's 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 loan losses. This review supported management's assertion that the allowance was adequate at December 31, 2001.

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 included in operating expenses, are also disclosed. Management does not believe that there is a concentration of loans to borrowers engaged in similar activities. Please refer to Note 9 in NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Loans having recorded investments of $5.6 million at December 31, 2001, have been identified as impaired in accordance with the provisions of SFAS 114. They represent 1.1% of gross loans. Commercial loans comprised $.5 million of the total, with loans secured by real estate accounting for $4.7 million, and installment loans $.3 million. Interest received on these loans during 2001 was $345,000, during 2000 was $584,000, and during 1999 was $385,000. The gross interest income that would have been recorded 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 $348, $801, and $485 thousand for the years ended December 31, 2001, 2000, and 1999 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.
**TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO**

December 31 
 
 
 
 
 
(Dollars In Thousands) **2001
2000
1999
1998
1997** 
 
 
 ** 
Average amount of gross loans outstanding **$ **468,861 
$ 
354,811 
$ 
323,374 
$ 
324,838 
$ 
317,079 
 ** ** 
 
 
 
 
 
 
 
 
Balance of allowance for possible loan 
losses at beginning of year **$ **5,322 
$ 
4,818 
$ 
3,852 
$ 
2,943 
$ 
2,926 
 
 
 ** ** 
Balance from acquisition **1,097 
- 
218 
- 
- 
Loans charged off ** 
 
 
 
 
Loans secured by real estate **21 
190 
317 
619 
88 
Commercial and industrial loans **377 
50 
236 
1,041 
605 
Loans to individuals **652 
475 
578 
914 
1,371 ** 
 
 
 
 
TOTAL LOANS CHARGED OFF **1,050 
715 
1,131 
2,574 
2,064 
Recoveries of loans previously charged off ** 
 
 
 
 
Loans secured by real estate **12 
221 
41 
1 
8 
Commercial and industrial loans **17 
4 
17 
61 
53 
Loans to individuals **109 
94 
121 
121 
80 ** 
 
 
 
 
TOTAL RECOVERIES **138 
319 
179 
183 
141 ** 
 
 
 
 
NET LOANS CHARGED OFF **912 
396 
952 
2,391 
1,923 ** 
 
 
 
 
Provision charged to operating expenses **1,200 
900 
1,700 
3,300 
1,940 ** 
 
 
 
 
BALANCE AT END OF YEAR **$ **6,707 
$ 
5,322 
$ 
4,818 
$ 
3,852 
$ 
2,943 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net charge-offs during the period 
_________________________________________________________________________________________

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
______________________________________________________________________________
**CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS

Historically, internal growth has financed the capital needs of the Bank. At December 31, 2001, the Corporation had a ratio of tier 1 capital to average assets of 9.17%. This compares to a ratio of tier 1 capital to average assets of 12.09% at December 31, 2000, and 11.43% at December 31, 1999. The current ratio is lower because identifiable intangibles related to the acquisition reduced capital as average total assets increased.

Cash dividends declared in 2001 were 26% of net income. Additional dividends of approximately $20.1 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, 2001, the Corporation's ratios of Tier I capital to risk-weighted assets and total capital to risk-weighted assets were 14.3% and 15.6% respectively. At December 31, 2000, the comparable ratios were 20.6% and 21.3%, respectively. Please refer to Note 10 in the NOTES TO CONSOLIDATED 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 eight years. The following table is the data illustrated by this graph in thousands of dollars. 

**AVERAGE EQUITY**
(In Thousands)
1993 
37,454
1994
41,820
1995 
46,755
1996 
52,067
1997 
57,806 
1998
63,032
1999
70,161
2000
76,019
2001
86,239

__________________________________________________________________________________________ 
**RESULTS OF OPERATIONS

Interest Income

Total interest income increased 17.5% in 2001. Interest and fees earned on loans increased 24.9% in 2001 accounting for 71.9% of tax equivalent gross interest income. Interest earned on securities and other investments increased 1.8% in 2001 making up the balance of gross interest income. Total interest income increased 10.3% in 2000 and 2.9% in 1999.
**Interest Expense

Total interest expense increased 10.6% in 2001, compared to a 20.4% increase in 2000, and a 2.9% increase in 1999. A falling interest rate environment contributed to the decline in interest expense in 2001 and a rising interest rate environment coupled with increasing competition are behind the increase in interest expense in 2000. The cost of interest-bearing deposits is monitored monthly by the Asset/Liability Committee. The net interest margin (tax equivalent net interest income divided by average earning assets) was 4.30% at the end of 2001, 4.19% at the end of 2000, and 4.40% at the end of 1999.

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.

 

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
______________________________________________________________________________

 

A pie chart is included at this point in the materials sent to our stockholders illustrating the composition of noninterest income in 2001 and the percentage each category is of the total. The following table is the data illustrated by this graph in thousands of dollars.

**2001 Noninterest Income**
Trust 
1,862
19%
Other service fees 
537
5%
Deposit fees 
6,822
68%
Other 
812
8%
**Noninterest Income and Expense

Noninterest income increased 26.4% during 2001 due mostly to income from service fees on deposit relationships strengthened by new products.Noninterest income increased 10.3% in 2000 and decreased 4.9% in 1999.
Noninterest expenses, excluding the provision for possible loan losses, increased 21.8% in 2001. Salary and benefit increases related to the acquisition contribute to this increase. Noninterest expenses increased 5.9% in 2000 and 10.2% increase in 1999.

A pie chart is included at this point in the materials sent to out 

stockholders illustrating the composition of noninterest expense in 2001 and 

the percentage each category is of the total. The following table is the data illustrated by this graph in thousands of dollars. 

**2001 Noninterest Expense**
Personnel 
11,567
50%
Occupancy 
1,720
7%
Furniture & Equipment 
928
4%
Other 
8,980
39%

 
**Net Income

Net income was 27.5% higher in 2001 than in 2000. Continued strength in the loan portfolio and the acquisition contributed to the increase with loan income up 24.5%. Interest expense was up 10.6%. The increase in noninterest income coupled with the strong net interest income more than covered the increase in noninterest expenses. Income tax expense was higher due to the increase in income. The acquisition made a strong contribution to net income accounting for approximately 16.5% of the increase with the remaining 83.5% of the increase coming from internal growth and new products.

____________________________________________________________________________________________
**IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD**
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," which change the rules for how companies must account for business combinations, goodwill and other intangible assets. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting, thus eliminating the pooling-of-interest method of accounting for business combinations. SFAS 142 specifies new rules for accounting for goodwill and other intangible assets including cessation of amortization of goodwill in favor of annual impairment reviews. The Bank adopted the provisions of the standards in 2002.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
______________________________________________________________________________

**Consolidated Statements of Income**
Dollars in Thousands Except Per Share Data**2001
2000
1999
1998
1997
INTEREST INCOME
Interest and fees on loans**$**39,031 
$ 
31,358 
$ 
28,017 
$ 
29,155 
$ 
28,841 ** 
 
 
 
 
Income on investment securities
Taxable interest**10,218 
10,097 
9,443 
7,326 
6,803 
Exempt from federal income tax**3,420 
3,108 
2,877 
2,583 
2,488 
Dividends**307 
278 
257 
300 
261 **13,945 
13,483 
12,577 
10,209 
9,552 
Other interest income**359 
598 
620 
689 
254 ** 
 
 
 
 
TOTAL INTEREST INCOME**53,335 
45,439 
41,214 
40,053 
38,647 ** 
 
 
 
 
INTEREST EXPENSE 
Interest on deposits**23,738 
21,486 
17,918 
17,414 
17,218 
Interest on other short term borrowings**147 
117 
32 
30 
86 ** 
 
 
 
 
TOTAL INTEREST EXPENSE**23,885 
21,603 
17,950 
17,444 
17,304 ** 
 
 
 
 
NET INTEREST INCOME**29,450 
23,836 
23,264 
22,609 
21,343 
PROVISION FOR POSSIBLE LOAN LOSSES**1,200 
900 
1,700 
3,300 
1,940 
NET INTEREST INCOME AFTER** 
 
 
 
 
PROVISION FOR LOAN LOSSES**28,250 
22,936 
21,564 
19,309 
19,403 ** 
 
 
 
 
NONINTEREST INCOME
Trust department income**1,862 
1,813 
1,670 
1,516 
1,471 
Service fees on deposit accounts**6,822 
5,136 
4,115 
3,669 
3,744 
Other service fees, commissions, and fees**537 
422 
727 
1,043 
845 
Other operating income**758 
566 
555 
985 
394 
Securities gains**54 
- 
130 
351 
488 ** 
 
 
 
 
TOTAL NONINTEREST INCOME**10,033 
7,937 
7,197 
7,564 
6,942 ** 
 
 
 
 
NONINTEREST EXPENSES
Salaries and employee benefits**11,567 
9,711 
8,645 
7,776 
7,319 
Net occupancy expense**1,765 
1,485 
1,524 
1,356 
1,317 
Furniture and equipment expense**928 
1,192 
1,251 
1,472 
1,500 
Other operating expenses**8,980 
6,780 
6,675 
5,816 
5,927 ** 
 
 
 
 
TOTAL NONINTEREST EXPENSES**23,240 
19,168 
18,095 
16,420 
16,063 ** 
 
 
 
 
INCOME BEFORE PROVISION
FOR INCOME TAXES**15,043 
11,705 
10,666 
10,453 
10,282 
PROVISION FOR INCOME TAXES**4,430 
3,379 
3,133 
3,112 
3,228 ** 
 
 
 
 
NET INCOME **$**10,613 
$ 
8,326 
$ 
7,533 
$ 
7,341 
$ 
7,054 
 ** ** 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE **$**4 
$ 
3 
$ 
3 
$ 
3 
$ 
3 
Weighted average shares outstanding**2,920,000 
2,920,000 
2,908,493 
2,800,000 
2,800,000 
(Note 1 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
__________________________________________________________________________________________

KraftCPAs

Kraft Bros., Esstman, Patton & Harrell, PLLC

CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS

 

 

 

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, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC

 

Nashville, Tennessee

February 28, 2002

 

1200 Parkway Towers - 404 James Robertson Pkwy. - Nashville, TN 37219 - Phone 615-242-7351 - Fax 615-256-1952 - www.kraftcpas.com
610 North Garden St. Suite 200, Columbia, Tennessee 38401 - Phone 931-388-3711

105 Bay Court, Lebanon, Tennessee 37087-Phone 615-449-2334

An independently owned member of the McGladrey Network

 
**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 function is provided by an outside company that 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, 2001. 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, 2001, 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 acknowledges responsibility for financial reporting and compliance with federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders.

Management has assessed its 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, 2001.

 

 

/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

February 28, 2002

 

KraftCPAs
**Kraft Bros., Esstman, Patton, & Harrell, PLLC

CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS

 

 

 

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, 2001, First Farmers and Merchants Corporation maintained an effective internal control system over financial reporting presented in conformity with accounting principles generally accepted in the United States of America.

Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of internal control structure over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assertion referred to above is fairly stated, in all material respects, based on the criteria described in *Internal Control--- Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

 

/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC

 

Nashville, Tennessee

February 28, 2002

 

 

 

 

1200 Parkway Towers - 404 James Robertson Pkwy. - Nashville, TN 37219 - Phone 615-242-7351 - Fax 615-256-1952 - www.kraftcpas.com
610 North Garden St. Suite 200, CoIumbia, Tennessee 38401 - Phone 931-388 3711

105 Bay Court, Lebanon, Tennessee 37087 - Phone 615-449-2334

An independently owned member of the McGladrey Network

 

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
December 31,
(Dollars in Thousands) 
2001
2000
ASSETS
Cash and due from banks
$
30,648 
$ 
23,029 
Interest-bearing deposits in banks
16 
5,008 
Total cash and cash equivalents
30,664 
28,037 
Securities
Available-for-sale (amortized cost $113,550
and $96,448 respectively)
117,218 
96,664 
Held-to-maturity (fair value $126,244
and $130,514 respectively)
123,234 
129,403 
Total securities - Note 2
240,452 
226,067 
Loans, net of deferred fees - Note 3
515,178 
377,092 
Allowance for possible loan losses - Note 4
(6,707)
(5,322)
Net loans
508,471 
371,770 
Bank premises and equipment, at cost
less allowance for depreciation - Note 5
10,978 
8,077 
Other assets
30,926 
18,115 
TOTAL ASSETS
$
821,491 
$ 
652,066 
LIABILITIES
Deposits
Noninterest-bearing
$
111,432 
$ 
81,435 
Interest-bearing (including certificates of deposit
over $100,000: 2001 - $98,272; 2000 - $55,976)
610,084 
475,376 
Total deposits
721,516 
556,811 
Federal funds purchased and securities sold
under agreements to repurchase
1,802 
7,551 
Dividends payable
1,518 
1,139 
Other short term liabilities
708 
735 
Accounts payable and accrued liabilities
6,159 
6,021 
TOTAL LIABILITIES
731,703 
572,257 
COMMITMENTS AND CONTINGENCIES
Notes 7 and 9
STOCKHOLDERS'
Common stock - $10 par value, 8,000,000 shares
EQUITY
authorized; 2,920,000 shares issued and
outstanding - Note 1
29,200 
29,200 
Additional paid-in capital
4,320 
4,320 
Retained earnings - Note 6
53,995 
46,156 
Accumulated other comprehensive income
2,273 
133 
TOTAL STOCKHOLDERS' EQUITY
89,788 
79,809 
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$
821,491 
$ 
652,066 
The accompanying notes are an integral part of the consolidated financial statements.

 

 

**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands Except Per Share Data)
Years Ended December 31, **2001
2000
1999
INTEREST & DIVIDEND INCOME
Interest and fees on loans
$**39,031 
$ 
31,358 
$ 
28,017 
Income on investment securities
Taxable interest**10,218 
10,097 
9,443 
Exempt from federal income tax**3,420 
3,108 
2,877 
Dividends**307 
278 
257 **13,945 
13,483 
12,577 
Other interest income**359 
598 
620 
TOTAL INTEREST INCOME**53,335 
45,439 
41,214 
INTEREST EXPENSE 
Interest on deposits**23,738 
21,486 
17,918 
Interest on other short term borrowings**147 
117 
32 
TOTAL INTEREST EXPENSE**23,885 
21,603 
17,950 
NET INTEREST INCOME**29,450 
23,836 
23,264 
PROVISION FOR POSSIBLE
LOAN LOSSES - Note 4**1,200 
900 
1,700 
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES**28,250 
22,936 
21,564 
NONINTEREST INCOME
Trust department income**1,862 
1,813 
1,670 
Service fees on deposit accounts**6,822 
5,136 
4,115 
Other fees and commissions**537 
422 
727 
Other operating income**758 
566 
555 
Securities gains**54 
- 
130 
TOTAL NONINTEREST INCOME**10,033 
7,937 
7,197 
NONINTEREST EXPENSES
Salaries and employee benefits**11,567 
9,711 
8,645 
Net occupancy expense**1,765 
1,485 
1,524 
Furniture and equipment expense**928 
1,192 
1,251 
Other operating expenses**8,980 
6,780 
6,675 
TOTAL NONINTEREST EXPENSES**23,240 
19,168 
18,095 
INCOME BEFORE PROVISION FOR
INCOME TAXES**15,043 
11,705 
10,666 
PROVISION FOR INCOME TAXES - Note 8**4,430 
3,379 
3,133 
NET INCOME 
$**10,613 
$ 
8,326 
$ 
7,533 
EARNINGS PER SHARE
Common Stock - Note 1
(Weighted average shares outstanding:
2001 - 2,920,000; 2000 - 2,920,000;
1999 - 2,908,493)
$**4 
$ 
3 
$ 
3 
The accompanying notes are an integral part of the consolidated financial statements.

 

 

**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
(Dollars In Thousands Except Per Share Data)
Additional
Other
Common
Paid-in
Retained
Comprehensive
Years Ended December 31, 2001, 2000, and 1999
Stock
Capital
Earnings
Income (Loss)
Total
BALANCE AT JANUARY 1, 1999
$
28,000 
$ 
-
$ 
34,560 
$ 
590 
$ 
63,150 
Comprehensive income
Net income
7,533 
7,533 
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification 
adjustment and tax effects
(2,083)
(2,083)
Total comprehensive income
5,450 
Bank acquisition - Note 11
1,200 
4,320 
5,520 
Cash dividends declared, $.70 per share 
(2,044)
(2,044)
BALANCE AT DECEMBER 31, 1999
29,200 
4,320 
40,049 
(1,493)
72,076 
Comprehensive income
Net income
8,326 
8,326 
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification 
adjustment and tax effects
1,626 
1,626 
Total comprehensive income
9,952 
Cash dividends declared, $.76 per share
(2,219)
(2,219)
BALANCE AT DECEMBER 31, 2000
29,200 
4,320 
46,156 
133 
79,809 
Comprehensive income
Net income
10,613 
10,613 
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification 
adjustment and tax effects
2,140 
2,140 
Total comprehensive income
12,753 
Cash dividends declared, $.95 per share
(2,774)
(2,774)
BALANCE AT DECEMBER 31, 2001
$
29,200 
$ 
4,320 
$ 
53,995 
$ 
2,273 
$ 
89,788 
The accompanying notes are an integral part of the consolidated financial statements.

 

 

**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Dollars In Thousands)
Years Ended December 31,
2001
2000
1999
OPERATING
Net income
$
10,613 
$ 
8,326 
$ 
7,533 
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
288 
504 
748 
Provision for depreciation and amortization of
premises and equipment
876 
1,124 
1,166 
Provision for depreciation of leased equipment
150 
300 
300 
Amortization of intangibles
1,066 
271 
218 
Amortization of investment security premiums,
net of accretion of discounts
500 
635 
911 
Increase in cash surrender value of life insurance contracts
(271)
(257)
(184)
Deferred income taxes
(84)
(312)
(429)
(Increase) decrease in
Interest receivable
483 
(440)
(267)
Other assets
(1,338)
543 
304 
Increase (decrease) in
Interest payable
(1,446)
1,094 
244 
Other liabilities
391 
(115)
(426)
Total Adjustments
615 
3,347 
2,585 
Net cash provided by operating activities
11,228 
11,673 
10,118 
INVESTING
Proceeds from maturities, calls, and sales of
ACTIVITIES
available-for-sale securities
27,995 
27,408 
28,958 
Proceeds from maturities and calls of held-to-maturity securities
17,825 
8,167 
15,865 
Purchases of investment securities
Available-for-sale
(26,594)
(9,995)
(47,486)
Held-to-maturity
(11,802)
(13,378)
(25,869)
Increase in loans
(25,621)
(41,093)
(10,598)
Purchases of premises and equipment
(2,119)
(895)
(1,390)
Purchase of single premium life insurance contracts
(425)
(600)
(920)
Net increase in cash from acquisitions
3,457 
- 
2,789 
Net cash used by investing activities
(17,284)
(30,386)
(38,651)
FINANCING
Net increase in noninterest-bearing and interest-bearing deposits
16,854 
15,995 
22,604 
ACTIVITIES
Net increase (decrease) in short term borrowings
(5,777)
7,182 
366 
Cash dividends
(2,394)
(2,131)
(1,888)
Net cash provided by financing activities
8,683 
21,046 
21,082 
Increase (decrease) in cash and cash equivalents
2,627 
2,333 
(7,451)
Cash and cash equivalents at beginning of period
28,037 
25,704 
33,155 
Cash and cash equivalents at end of period
$
30,664 
$ 
28,037 
$ 
25,704 
Supplemental disclosures of cash flow information
Cash paid during the period for expenses
Interest on deposits and borrowed funds
$
24,200 
$ 
20,509 
$ 
17,706 
Income taxes
4,589 
3,827 
3,758 
The accompanying notes are an integral part of the consolidated financial statements.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

____________________________________________________________________________________________

NOTE 1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

First Farmers and Merchants Corporation, the Corporation, owns one hundred percent of First Farmers and Merchants National Bank, the Bank. The Bank conducts a fullservice commercial banking business through twenty offices in its community service area which is comprised of Maury, Lawrence, Marshall, Hickman, Dickson, and adjacent counties in southern middle Tennessee. The Bank owns one hundred percent of F & M West, a Nevada subsidiary that provides advisory service for management of the Bank's investment portfolio.
**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, its whollyowned subsidiary, the Bank, and the Bank's whollyowned subsidiary, F & M West. 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. Those estimates and assumptions also affect 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate, deferred tax assets, and trading activities. 
**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, 2001, approximately $3 million was required to be maintained at the Federal Reserve Bank. Interestbearing deposits in banks mature within one year and are carried at cost. From time to time throughout the year, the Bank's balances due from other financial institutions exceeded FDIC insurance limits. Management considers this to be a normal business risk.
**Cash Equivalents

Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for oneday periods. Interestbearing deposits in banks included in cash equivalents mature within ninety days.
**Securities

Trading account 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 2001 or 2000.

Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as heldtomaturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.

Those securities not classified as heldtomaturity or trading, including equity securities with readily determinable fair values, are classified as availableforsale 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 availableforsale

securities are determined using the specific identification method.

Declines in the fair value of individual availableforsale and heldtomaturity securities below their cost that are other than temporary are included in earnings as realized losses.

<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
______________________________________________________________________________
**NOTE 1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans

The Bank grants mortgage, commercial, and consumer loans to customers. Most of the Bank's activities are with customers located within southern middle Tennessee. The Bank does not have any significant concentrations in any one industry or customer. 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 pastdue or when interest is not expected to be collected. 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 smallerbalance 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 writedown 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 writedown is recognized by a charge to operations. When the property is not in a condition suitable for sale or use at the time of foreclosure, completion and holding costs, including such items as real estate taxes, maintenance and insurance, are capitalized up to the estimated net realizable value of the property. However, when the property is in a condition for sale or use at the time of foreclosure, or the property is already carried at its estimated net realizable value, any subsequent holding costs are expensed. Legal fees and any other direct costs relating to foreclosures are charged to operations when incurred.

The Bank's recorded value for other real estate was approximately $873,000 at December 31, 2001, and $474,000 at December 31, 2000.

<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________________________________________________________________________________________

NOTE 1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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
**Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $27.9 million and $27.6 million at December 31, 2001 and 2000, respectively. The present value of servicing income is expected to approximate an adequate compensation cost for servicing these loans. Therefore, no servicing asset has been recorded.
**Income Taxes

The companies file a consolidated federal income tax return. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
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.
**Trust Department Income

Trust department income is recognized on the accrual basis in the applicable period earned.
**Intangible Assets

Deposit base intangibles and goodwill identified in merger transactions are amortized over 42 to 180 months on the straightline method. Total amortization expense charged to operations amounted to: 2001 $1,066,000; 2000 $271,000; and 1999 $218,000. Note 11 discusses current acquisitions.**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 hadbeen issued, as well as any adjustment to income that would result from the assumed conversion. For the years ended December 31, 2001, 2000, and 1999, there were no potentially dilutive common shares issuable.

 

 

Years Ended December 31,
 
 
 
 
 
2001
2000
1999
 
 
 
Unrealized holding gains (losses)
on availableforsale securities
$
3,506 
$ 
2,623 
$ 
(3,229)
Reclassification adjustment for losses
(gains) realized in income
(54)
(130)
Tax effect (expense) benefit
(1,312)
(997)
1,276 
 
 
 
Netoftax amount
$
2,140 
$ 
1,626 
$ 
(2,083)
 
 
 

Table I Components of Other Comprehensive Income

Dollars in Thousands

<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________________________________________________________________________________________

NOTE 1 GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income

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 availableforsale 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. A schedule of comprehensive income is shown in Table I above.
**Segment Reporting

Segments are strategic business units that offer different products and services and are managed separately. At December 31, 2001, the Corporation and the Bank did not have any identified segments.
**NOTE 2 SECURITIES**
Securities with an amortized cost of $103,149,000 and $87,228,000 at December 31, 2001 and 2000, respectively (fair value: 2001 $107,487,000; 2000 $87,956,000), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized cost and fair value reflect current interest rates and represent the potential gain (or loss) had the portfolio been liquidated on that date. Security gains (or losses) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 2001, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.

Amortized
Gross Unrealized
Fair
Cost
Gain
 
Loss
Value**December 31, 2001** ** ** ** ** 
Availableforsale securities
U.S. Treasury**$ **6,128 **$ **114 **$ **11 **$ **6,231 
U.S. Government agencies**90,710 **3,185 **15 **93,880 
Mortgage backed securities**13,407 **321 **13,728 
Other securities**3,305 **77 **3 **3,379 ** ** ** ** **$ **113,550 **$ **3,697 **$ **29 **$ **117,218 
 ** 
 ** 
 ** 
 ** 
 
Heldtomaturity securities
U.S. Treasury**$ **3,016 **$ **54 **$ **$ **3,070 
U.S. Government agencies**36,975 **1,791 **38,766 
States and political subdivisions**70,192 **1,083 **472 **70,803 
Other securities**13,051 **574 **20 **13,605 ** ** ** ** **$ **123,234 **$ **3,502 **$ **492 **$ **126,244 
 ** 
 ** 
 ** 
 ** 
 
December 31, 2000
Availableforsale securities
U.S. Treasury
$ 
6,536 
$ 
29 
$ 
3 
$ 
6,562 
U.S. Government agencies
86,638 
635 
458 
86,815 
Other securities
3,274 
16 
3 
3,287 
 
 
 
 
$ 
96,448 
$ 
680 
$ 
464 
$ 
96,664 
 ** ** ** ** 
 ** ** ** 
Heldtomaturity securities
U.S. Treasury
$ 
7,091 
$ 
44 
$ 
$ 
7,135 
U.S. Government agencies
44,584 
446 
74 
44,956 
States and political subdivisions
66,487 
988 
334 
67,141 
Other securities
11,241 
127 
86 
11,282 
 
 
 
 
$ 
129,403 
$ 
1,605 
$ 
494 
$ 
130,514 

___________________________________________________________________________________

Table II Amortized Cost and Fair Value of Securities

Dollars in Thousands
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 SECURITIES (Continued)

At December 31, 2001, the Bank 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 III shows the amortized cost, fair value, and weighted yields (for taxexempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 2001, 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 availableforsale securities were $27,995,000, $27,408,000, and $28,958,000 during 2001, 2000, and 1999, respectively. Proceeds from the maturity or call of heldtomaturity securities were $17,825,000, $8,167,000, and $15,865,000 during 2001, 2000, and 1999, respectively. Gross gains of $54,000 were realized on dispositions in 2001. There were no gains or losses realized on the dispositions in 2000. Gross gains of $130,000 were realized on the dispositions in 1999. 

Amortized
Fair
Yield
Cost
Value
(Unaudited)**Availableforsale securities
 
 
 
U.S. Treasury
Within one year
$
4,012 **$ **4,126 
5.7%
After one but within five years
2,116 **2,105 
4.1%
U.S. Government agencies
Within one year
20,581 **20,934 
5.5%
After one but within five years
56,134 **58,544 
6.1%
After five but within ten years
13,995 **14,402 
5.8%
Mortgage backed securities
After five but within ten years
1,031 **1,075 
7.5%
After ten years
12,376 **12,653 
6.1%
Other securities 
3,305 **3,379 
10.5%
 ** 
$
113,550 **$ **117,218 
 
 
 
 
 
 
 **Heldtomaturity securities
U.S. Treasury
Within one year**$**3,016 
$ 
3,070 
6.0%
U.S. Government agencies
Within one year**6,788 
6,952 
6.4%
After one but within five years**30,187 
31,814 
6.3%
States and political subdivisions
Within one year**4,904 
4,951 
7.3%
After one but within five years**15,022 
15,371 
6.9%
After five but within ten years**21,979 
22,241 
7.2%
After ten years**28,287 
28,240 
7.4%
Other securities
Within one year**498 
511 
7.3%
After one but within five years**8,707 
9,099 
6.6%
After five but within ten years**3,846 
3,995 
7.3%** 
 **$**123,234 
$ 
126,244 

______________________________________________________________________

Table III Contractual Maturity of Securities and Weighted Tax Equivalent Yields

Dollars in Thousands

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
______________________________________________________________________________
**NOTE 3 LOANS**

**2001
2000
 
 
Commercial, financial and agricultural**$**74,491 
$ 
46,691 
Tax exempt municipal loans**9,687 
6,317 
Real estate
Construction**11,734 
6,561 
Commercial mortgages**129,600 
89,461 
Residential mortgages**214,101 
174,999 
Other**18,188 
6,304 
Consumer loans**53,144 
47,040 
Lease financing receivables**4,514 
 
 **515,459 
377,373 
Less:
Net unamortized loan origination fees**(281)
(281)
Allowance for possible loan losses**(6,707)
(5,322)
 
 **$**508,471 
$ 
371,770 

___________________________________________________________________

Table IV Loans Outstanding by Category at December 31, 2001 and 2000

Dollars in Thousands

 

Within
One to
After 
One Year
Five Years
Five Years
Total
 
 
 
 
Fixed rate loans**$**88,624**$**119,112**$**109,914**$**317,650
Variable rate loans**33,318**16,023**148,468**197,809** ** ** ** **$**121,942**$**135,135**$**258,382**$**515,459

__________________________________________________________________________

Table V Loan Maturities at December 31, 2001

Dollars in Thousands

Loans having recorded investments of $5,619,000 at December 31, 2001, have been identified as impaired. The total allowance for possible loan losses related to these loans was $650,000. Interest received on these loans during 2001 was $345,000, during 2000 was $584,000, and during 1999 was $385,000. Impaired loans had recorded investments of approximately $5,421,000 at December 31, 2000, with $361,000 of the allowance for possible loan losses related to these loans.

Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 2001 and 2000, is shown in Table VI 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 2001 or 2000.
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
___________________________________________________________________________________________________________
**NOTE 3 LOANS (Continued)**

Balance at
Balance at
Beginning
Amount
End
of Year
Additions
Collected
of Year**2001
 
 
 
 **Aggregate of certain party loans**$**3,047**$**6,469**$**5,333**$**4,183
 
 
 
 
 
 
 
 
 
2000
Aggregate of certain party loans
$
3,500
$
4,144
$
4,597
$
3,047

_______________________________________________________________________________________

Table VI Analysis of Activity in Certain Party Loans

Dollars in Thousands

______________________________________________________________________________________________________
**NOTE 4 ALLOWANCE FOR POSSIBLE LOAN LOSSES**

**2001
2000
1999** 
 
 
Balance at beginning of year**$**5,322 
$ 
4,818 
$ 
3,852 
Increase due to acquisition**1,097 
218 
Provision charged to operating expenses**1,200 
900 
1,700 
Loan losses:
Loans charged off**(1,050)
(715)
(1,131)
Recoveries on loans previously 
charged off**138 
319 
179 ** 
 
 
Balance at end of year**$**6,707 
$ 
5,322 
$ 
4,818 

________________________________________________________________________________________________________
**NOTE 5 BANK PREMISES AND EQUIPMENT**

**2001
2000
 
 
Land**$ **1,714 
$ 
1,490 
Premises**12,108 
9,012 
Furniture and equipment**6,023 
5,717 
Leasehold improvements**1,236 
1,231 
 
 **21,081 
17,450 
Less allowance for depreciation and amortization**(10,103)
(9,373)** 
 **$ **10,978 
$ 
8,077 

______________________________________________________________________

Table VIII Premises and Equipment at December 31, 2001 and 2000

Dollars in Thousands
**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 $876,000 for 2001, $1,124,000 for 2000, and $1,166,000 for 1999. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling approximately $3,173,000 at December 31, 2001. 

__________________________________________________________________________________________________________
**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, 2001, additional dividends of approximately $20.1 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 office equipment are leased under cancelable operating leases. Total rental expense incurred under all operating leases, including shortterm leases with terms of less than one month, amounted to $33,000, $32,000, and $37,000 for equipment leases, and $140,000, $143,000, and $160,000 for building leases, in 2001, 2000, and 1999, respectively. Future minimum lease commitments as of December 31, 2001, under all noncancelable operating leases with initial terms of one year or more are shown in Table IX.

Lease 
Year 
Payments 
 
 
 
 
 
 
2002
$
120
2003
120
2004
128
2005
128
2006
128
Thereafter
284
 
Total
$
908
**____________________________________________

Table IX Future Minimum Lease Commitments

Dollars in Thousands
** 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________________________________________________________________________________________________

NOTE 8 FEDERAL AND STATE INCOME TAXES

 **
_____________________________________________________

**2001
2000
1999
Current:** 
 
 
Federal**$ **3,625 
$ 
2,954 
$ 
2,863 
State**889 
737 
699 
 
 
 
Total current**4,514 
3,691 
3,562 ** 
 
 
Deferred:
Federal**(66)
(265)
(364)
State**(18)
(47)
(65)** 
 
 
Total deferred**(84)
(312)
(429)** 
 
 
Total provision for income taxes**$ **4,430 
$ 
3,379 
$ 
3,133 

______________________________________________________________________

Table X Provisions for Income Taxes

Dollars in Thousands

**2001
2000
1999** 
 
 
Allowance for possible loan losses**$**2,132 
$ 
2,023 
$ 
1,750 
Deferred compensation**800 
704 
559 
Unrealized loss on AFS securities
915 
Deferred loan fees**3 
5 
8 ** 
 
 
Deferred tax asset**2,935 
2,732 
3,232 
 
 
 
Unrealized gain on AFS securities**(1,385)
(82)
Lease financing depreciation, net of rent**(107)
Other**(339)
(327)
(224)** 
 
 
Deferred tax liability**(1,831)
(409)
(224)** 
 
 
Net deferred tax asset**$**1,104 
$ 
2,323 
$ 
3,008 

_______________________________________________________________________

Table XI Deferred Tax Effects of Principal Temporary Differences

Dollars in Thousands

The net deferred tax asset is included in other assets in the accompanying consolidated balance sheets.

**2001
2000
1999** 
 
 
Tax expense at statutory rate**$**5,114 
$ 
3,980 
$ 
3,626 
Increase (decrease) in taxes resulting from:
Taxexempt interest**(1,325)
(1,157)
(1,003)
Nondeductible interest expense**191 
164 
122 
Employee benefits**(92)
(87)
(63)
Amortization of goodwill**50 
50 
49 
Other nondeductible expenses
(nontaxable income) net**14 
13 
15 
State income taxes, net of federal
tax benefit**586 
479 
461 
Dividend income exclusion**(33)
(26)
(29)
Other**(75)
(37)
(46)** 
 
 
Total provision for income taxes**$**4,430 
$ 
3,379 
$ 
3,133 
 ** ** 
 
 
 
 
Effective tax rate**29.5%
28.9%
29.4%

Table XII Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed

at the Federal Statutory Rate (34% Each Year)

Dollars in Thousands

<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________________________________________________________________________________________________

NOTE 9 COMMITMENTS AND CONTINGENCIES**
The Bank is a party to financial instruments with offbalancesheet 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, 2001, were approximately $48 million and $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. 

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Corporation's consolidated financial statements.

___________________________________________________________________________________________________________
**NOTE 10 STOCKHOLDERS' EQUITY**
The Corporation and the Bank are subject to federal regulatory riskadjusted 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 the Bank. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain offbalancesheet 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 riskweighted assets and of Tier I Capital to average assets. Management believes, as of December 31, 2001 and 2000, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. 

The Bank's calculated riskadjusted capital ratios exceeded the minimum standard for a "well capitalized" bank as of December 31, 2000, 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 XIII.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

__________________________________________________________________________________________________________

NOTE 10 SHAREHOLDERS' EQUITY**(Continued)**

To Be Well
Capitalized Under
For Capital
Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
 
 
 
 ** 
 
As of December 31, 2001
Amount
Ratio
Amount
Ratio > or =
Amount
Ratio > or =
Total Capital (to Risk Weighted** ** ** ** ** ** 
Assets) Consolidated**$**80,508 **15.44%**$**41,709 **8.00%**$
Bank**79,103 **15.21%**41,596 **8.00%**51,995 **10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated**73,801 **14.15%**20,862 **4.00%
Bank**72,604 **13.96%**20,797 **4.00%**31,196 **6.00%
Tier I Capital (to Average
Assets) Consolidated**73,801 **9.08%**32,495 **4.00%
Bank**72,604 **8.94%**32,469 **4.00%**40,586 **5.00%
As of December 31, 2000
Total Capital (to Risk Weighted
Assets) Consolidated
83,438 
21.34%
31,273 
8.00%
Bank
82,386 
21.12%
31,211 
8.00%
39,014 
10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated
78,544 
20.06%
15,661 
4.00%
Bank
77,510 
19.87%
15,605 
4.00%
23,408 
6.00%
Tier I Capital (to Average
Assets) Consolidated
78,544 
12.09%
25,982 
4.00%
Bank
77,510 
11.96%
25,927 
4.00%
32,409 
5.00%

 

Table XIII Capital Amounts and Capital Adequacy Ratios

Dollars in Thousands

_______________________________________________________________________________________________________
**NOTE 11 ACQUISITIONS**
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 as a branch office. The Office of the Comptroller of the Currency granted approval of this transaction as did appropriate state regulatory authorities. On February 5, 1999, the acquisition of the assets and the assumption of certain liabilities indicated in Table XIV was completed by the issuance of 120,000 shares of Corporation common stock at market value. The transaction was accounted for by the purchase method of accounting. Goodwill recorded as a result of the transaction is being amortized over ten years on a straightline basis. All assets, liabilities, and associated income and expenses of that branch are included in the consolidated financial statements from the acquisition date.

Cash 
$ 
2,789 
Deposits 
$ 
17,682 
Securities 
13,024 
Other liabilities 
125 
Loans, net 
4,998 
Other assets 

Table XIV Assets and Liabilities Acquired Through Acquisition

Dollars in Thousands
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________

NOTE 11 ACQUISITIONS (Continued)**
In December, 2000, the Bank entered into an agreement with First Tennessee National Corporation and Peoples and Union Bank of Lewisburg to purchase all of the outstanding common stock of Peoples and Union Bank, Lewisburg, Tennessee. The Office of the Comptroller of the Currency granted approval of this transaction as did appropriate state regulatory authorities. On April 27, 2001, the acquisition was completed as a cash transaction accounted for by the purchase method of accounting. The fair values of identifiable assets acquired and liabilities assumed are presented in Table XV. In addition, goodwill of $8,376,000 was recorded as a result of the transaction which was amortized for eight months in 2001 on a straightline basis with a fifteen year life. A core deposit intangible of $4,506,000 was recognized and is being amortized over six years, the average life of the deposits acquired. All assets, liabilities, and associated income and expenses of that branch are included in the consolidated financial statements from the acquisition date. Supplemental pro forma information for the current and prior periods is included in Table XVI.

Cash
$
3,457
Deposits
$
147,851
Securities AFS
18,857
Other liabilities
1,192
Loans, net
111,369
Other assets
2,478

Table XV Assets and Liabilities Acquired Through Acquisition

Dollars in Thousands

 
 
2001
 
2000
 
 
 
 
 
Net interest income
$
31,169 
$ 
29,301 
Provision for loan losses
 
1,227 
 
980 
Noninterest income
 
10,321 
 
8,657 
Noninterest expense
 
28,847 
 
26,296 
Net income
 
11,416 
 
10,682 
Net income per share
 
3.91
 
3.66

Table XVI Summary Pro Forma Operating Information as if the Acquisition had Occurred January 1, 2000 

Dollars in Thousands Except Per Share Data

In December, 2001, the Bank entered into an agreement with Community Bank, an Alabama banking corporation, to purchase certain assets and assume certain deposit liabilities of two offices in Pulaski, Giles County, Tennessee. Pending regulatory approval, the acquisition is expected to be completed within the first quarter of 2002.

 

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________

NOTE 12 FAIR VALUES OF FINANCIAL INSTRUMENTS**

**December 31, 2001
December 31, 2000** ** ** 
 
 
 **Carrying**Fair
Carrying
Fair**Amount**Value
Amount
Value** ** 
 
 
Financial assets
Cash and due from banks**$**30,664**$**30,664
$
28,037
$
28,037
Securities availableforsale**117,218**117,218
96,664
96,664
Securities heldtomaturity**123,234**126,245
129,403
130,514
Loans, net**508,471**542,026
371,770
371,425
Accrued interest receivable**6,836**6,836
6,557
6,557
Financial liabilities
Deposits**721,516**725,249
556,811
558,347
Federal funds purchased and
securities sold under agreements
to repurchase**1,802**1,802
7,551
7,551
Other short term liabilities**708**708
735
735
Accrued interest payable**3,643**3,643
3,958
3,958

 

Table XVII Summary of Fair Values of Financial Instruments

Dollars in thousands

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 from historical cost accounting. Securities availableforsale and securities heldtomaturity 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 from 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, 2001, the Bank had outstanding standby letters of credit and commitments to extend credit. These offbalancesheet 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. 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________

NOTE 13 QUARTERLY RESULTS OF OPERATIONS (Unaudited)**

**First**Second**Third**Fourth**Quarter**Quarter**Quarter**Quarter**Total**2001** ** ** ** ** 
Interest income**$**11,896**$**13,626**$**14,265**$**13,548**$**53,335
Interest expense**5,693**6,433**6,462**5,297**23,885** ** ** ** ** 
Net interest income**6,203**7,193**7,803**8,251**29,450
Provision for possible loan 
losses**255**300**300**345**1,200
Noninterest expenses, net of
noninterest income**2,535**3,217**3,516**3,939**13,207** ** ** ** ** 
Income before income taxes**3,413**3,676**3,987**3,967**15,043
Income taxes**980**937**1,329**1,184**4,430** ** ** ** ** 
Net income**$**2,433**$**2,739**$**2,658**$**2,783**$**10,613
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share
(2,920,000 shares)**$**0.83**$**0.94**$**0.91**$**0.95**$**3.63
 ** 
 ** 
 ** 
 ** 
 ** 
 
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Total
2000
 
 
 
 
 
Interest income
$
10,863
$
11,279
$
11,501
$
11,796
$
45,439
Interest expense
4,994
5,251
5,547
5,811
21,603
 
 
 
 
 
Net interest income
5,869
6,028
5,954
5,985
23,836
Provision for possible loan 
losses
225
225
225
225
900
Noninterest expenses, net of
noninterest income
2,853
2,868
2,611
2,899
11,231
 
 
 
 
 
Income before income taxes
2,791
2,935
3,118
2,861
11,705
Income taxes
757
856
946
820
3,379
 
 
 
 
 
Net income
$
2,034
$
2,079
$
2,172
$
2,041
$
8,326
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share
(2,920,000 shares)
$
0.70
$
0.71
$
0.74
$
0.70
$
2.85

Table XVIII Consolidated Quarterly Results of Operations 

Dollars in Thousands Except Per Share Data

________________________________________________________________________________________________________
**NOTE 14 DEPOSITS**
The Bank does not have any foreign offices and all deposits are serviced in its twenty domestic offices. Maturities of time deposits of $100,000 or more and of all time deposits at December 31 are indicated in Table XIX and Table XX, respectively.

**2001
2000
1999
Under 3 months**$**29,858
$
12,959
$
10,069
3 to 12 months**54,974
35,386
33,235
Over 12 months**13,440
7,631
5,762** 
 
 **$**98,272
$
55,976
$
49,066

___________________________________________________________________________________________________________

Table XIX Maturities of Time Deposits of $100,000 or More at December 31 

Dollars in Thousands

<PAGE>
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

________________________________________________________________________________________________________

NOTE 14 DEPOSITS**(Continued)**

Interest bearing transaction accounts
$
275,983
2002
283,260
2003
34,596
2004
5,746
2005
5,636
2006
4,678
Thereafter
185
 
$
610,084

Table XX Maturities of Interest Bearing Deposits at December 31, 2001 

Dollars in Thousands

___________________________________________________________________________________________________________
**NOTE 15 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE**
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction.

___________________________________________________________________________________________________________
**NOTE 16 CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION**
 

Condensed Balance Sheets
December 31, 2001 and 2000**2001
2000** 
 
Cash**$**30 
$ 
8 
Investment in bank subsidiary at equity**88,594 
78,777 
Investment in credit life insurance company at cost**50 
50 
Investment in other securities**22 
22 
Dividends receivable from bank subsidiary**1,518 
1,164 
Cash surrender value life insurance**1,532 
1,307 ** 
 
Total assets**$**91,746 
$ 
81,328 
 ** ** 
 
 
Liabilities
Payable to directors**$**440 **$ 
380 
Dividends payable**1,518 
1,139 ** 
 
Total liabilities**1,958 
1,519 
Stockholders' equity** 
 
Common stock $10 par value, authorized 8,000,000
shares; 2,920,000 shares issued and outstanding **29,200 
29,200 
Additional paidin capital**4,320 
4,320 
Retained earnings**53,995 
46,156 
Accumulated other comprehensive income**2,273 
133 ** 
 
Total stockholders' equity**89,788 
79,809 ** 
 
Total liabilities and stockholders' equity**$**91,746 **$ 
81,328 

_____________________________________________________________________________________________________

Table XXI Condensed Balance Sheets of Parent

Dollars in Thousands

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________________________

NOTE 16 CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)**

Condensed Statements of Income
Years Ended December 31, 2001 and 2000**2001
2000
 
 
Operating income
Dividends from bank subsidiary**$**2,874 **$ 
2,264 
Other dividend income**92 
61 
Interest income**1 
2 
Other**74 
67 
Operating expenses**(104)
(101)** 
 
Income before equity in undistributed net
income of bank subsidiary**2,937 
2,293 
Equity in undistributed net income of bank subsidiary**7,676 
6,033 ** 
 
Net Income**$**10,613 **$ 
8,326 
 
 
 
 
 

________________________________________________________________________

Table XXII Condensed Statements of Income of Parent

Dollars in Thousands

 

Condensed Statements of Cash Flows
Years Ended December 31, 2001 and 2000**2001
2000
Operating activities
 
 
Net income for the year**$**10,613 
$ 
8,326 
Adjustments to reconcile net income to net cash** 
 
provided by operating activities
Equity in undistributed net income of bank subsidiary**(7,676)
(6,033)
Increase in other assets**(419)
(169)
Increase in payables**58 
56 ** 
 
Total adjustments**(8,037)
(6,146)** 
 
Net cash provided by operating activities**2,576 
2,180 ** 
 
Investing activities
Purchase of single premium life insurance policy**(160)
(230)** 
 
Net cash used by investing activities**(160)
(230)** 
 
Financing activities
Cash dividends paid**(2,394)
(2,131)** 
 
Increase (decrease) in cash**22 
(181)
Cash at beginning of year**8 
189 ** 
 
Cash at end of year**$**30 
$ 
8 

 

_________________________________________________________________________

Table XXIII Condensed Statements of Cash Flows of Parent

Dollars in Thousands

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________

NOTE 17 EMPLOYEE BENEFIT PLANS**
The Bank contributes to a defined contribution, profitsharing 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 $1,039,000, $875,000, and $792,000, in 2001, 2000, and 1999, 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 (2001 $739,000; 2000 $714,000) purchased in 1993 to fund the plan and the related liability (2001 $498,000; 2000 $502,000) were included in other assets and other liabilities, respectively. Net noncash income recognized on these policies of $25,000 in 2001 and $26,000 in 2000 is included in the above asset values. Net noncash income was $16,000 in 1999. 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 $50,000 in 2001, $50,000 in 2000, and $50,000 in 1999.

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 $219,000 for 2001, $202,000 for 2000, and $199,000 for 1999 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 $425,000 in 2001 and $600,000 in 2000, were purchased for new participants. Net noncash income recognized on these policies of $208,000 in 2001 and $192,000 in 2000 is included in the cash surrender values of $4,954,000 and $4,321,000 reported in other assets at December 31, 2001 and 2000, respectively. Net noncash income was $124,000 in 1999.

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 (2001 $925,000; 2000 $886,000) is included in other assets, and net noncash income recognized on this policy of $38,000 in 2001 and $38,000 in 2000 are included in the above asset values. Net noncash income was $45,000 in 1999

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 $12 million.

_______________________________________________________________________________________________________

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS
SHAREHOLDER INFORMATION

 

The 2,920,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 2001 had a market value of $198.6 million and were held by 2,252 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. A special dividend was paid in 1998 that makes this ratio higher than other years. Without the special dividend, the payout ratio is in line with other years.

 

High
Low
Dividend**2001**First Quarter**$ **60.00 **$ **58.00 **$ **- **Second Quarter**60.00 **62.00 **0.43 **Third Quarter**62.00 **66.00 **- **Fourth Quarter**66.00 **68.00 **0.52 
2000
First Quarter
$ 
55.00 
$ 
55.00 
$ 
- 
Second Quarter
56.00 
55.00 
0.37 
Third Quarter
58.00 
56.00 
- 
Fourth Quarter
58.00 
58.00 
0.39 
1999
First Quarter
$ 
46.00 
$ 
46.00 
$ 
- 
Second Quarter
48.00 
46.00 
0.34 
Third Quarter
50.00 
48.00 
- 
Fourth Quarter
55.00 
50.00 
0.36 

 

 

 

 

 

**COMMON DIVIDEND PAYOUT RATIO**2001
2000
1999
1998
1997** 
 ** ** ** 
Earnings per share**$**3.63 
$ 
2.85 
$ 
2.59 
$ 
2.62 
$ 
2.52 
Cash dividends per share**$**0.95 
$ 
0.76 
$ 
0.70 
$ 
1.63 
$ 
0.55 
Ratio**0.26 
0.27 
0.27 
0.62 
0.22 

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**

**COMPARATIVE DATA
(Dollars In Thousands)
2001
2000
1999
1998
1997
 
 
 ** 
 
Average assets**$
778,855 
$ 
640,796 
$ 
600,857 
$ 
552,654 
$ 
527,926 
Average loans(net)**$
462,725 
$ 
349,727 
$ 
318,868 
$ 
321,239 
$ 
314,198 
Average deposits**$
680,352 
$ 
556,385 
$ 
524,265 
$ 
483,369 
$ 
463,576 
Return on
average assets
1.36%
1.30%
1.25%
1.33%
1.34%
Return on
beginning equity
13.29%
11.55%
11.98%
12.21%
12.97%
Tier 1 capital
to average assets
9.17%
12.09%
11.43%
11.19%
11.17%

 

**NET INTEREST MARGIN**
(Dollars In Thousands)**2001
2000
1999
1998
1997** 
 
 
 
 
Interest income
(tax equivalent)**$ **54,618 
$ 
46,502 
$ 
42,297 
$ 
41,046 
$ 
39,581 
Interest expense**23,885 
21,603 
17,950 
17,444 
17,304 ** 
 
 
 
 **$ **30,733 
$ 
24,899 
$ 
24,347 
$ 
23,602 
$ 
22,277 
 ** ** 
 
 
 
 
 
 
 
 
Net interest margin***4.30%
4.19%
4.40%
4.64%
4.65%
 ** ** 
 
 
 
 
 
 
 
 
*Net interest margin is net interest income (tax equivalent) divided by average earning assets.

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