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, 2002

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, 2003, was $219,000,000.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the issuer's common stock, as of March 1, 2003. 2,920,000 shares
This filing contains 86 pages.

 

DOCUMENTS INCORPORATED BY REFERENCE

(1)
Proxy Statement for 2002 Annual Stockholders Meeting of April 15, 2003. -- Parts I and III
 
 
(2)
Annual Report to Stockholders for Year Ended December 31, 2002. -- 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 three hundred twelve (312) full time employees and fifty-two (52) 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, an executive split dollar life insurance 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, 2002, 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, (3) a .23 acre residential lot located twelve miles south of Franklin in a subdivision in Spring Hill, Williamson County, Tennessee, (4) a .241 acre residential property located one to two miles southwest of downtown Columbia, Maury County, Tennessee, (5) a rural residential property three miles east of downtown Lewisburg, Marshall County, Tennessee, (6) a 12.687 acre rural residential property located fifteen miles southwest of Centerville, Hickman County, Tennessee, (7) a residential property located in Lawrenceburg, Lawrence County, Tennessee, and (8) 17 acres of rural property located near Pulaski, Giles 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, 2002.

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 15, 2003.

 

Executive Officers of Registrant

The following is a list as of March 1, 2003, 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:

 
Name
 

Age
Family

Relationship
Positions and
Offices Held
Waymon L. Hickman
68
None
Chairman of the Board and Director of FFMC. Chairman of the Board 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. Retired as Chief Executive Officer June 30, 2002.
 
 
 
 
T. Randy Stevens
51
None
President, Chief Executive Officer, and Director of FFMC. President, Chief Executive 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. Elected Chief Executive Officer of the Bank on June 30, 2002.
 
 
 
 
 

Executive Officers of Registrant-Continued

Name
Age
Family

Relationship
Positions and

Offices Held
John P. Tomlinson, III
52
None
Senior Executive Vice President, Chief Operating Officer 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. Elected Chief Operating Officer June 30, 2002.
 
 
 
 
Martha M. McKennon					
58
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				
58
None
Treasurer of FFMC. Executive Vice President and Chief Financial Officer/ Cashier of the Bank. Employed in 1980. Promoted to Bank Internal 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. Promoted to Executive Vice President of Bank in 2002.
 

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:
 
 
 
 
 
(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/ T. Randy Stevens_____________
	
T. Randy Stevens
 
President
 
(Chief Executive Officer)
 
 
Date	
_______________ March 18, 2003__ ________ __
 
 
 

 

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 / John P. Tomlinson____________
 
John P. Tomlinson,
 
Chief Operating Officer
 
(Chief Operating Officer of the Bank)
 
 
Date
_______________ March 18, 2003__ ________ __
 
 
 
 
 
__ _______/s / Patricia N. McClanahan_________
 
Patricia N. McClanahan, Treasurer
 
(Chief Financial Officer)
	
 
Date
_______________ March 18, 2003__ ________ __
 

Signatures -- continued
/s/ Kenneth A. Abercrombie______ 	
/s/ Joseph W. Remke, III_ _______
Kenneth A. Abercrombie, Director	
Joseph W. Remke, III, Director
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ James L. Bailey, Jr.__ ______ _
/s/ T. Randy Stevens III_ ______ _ 
James L. Bailey, Jr., Director
T. Randy Stevens, Director 
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ Hulet M. Chaney__________ _
/s/ John P. Tomlinson, III_ ______ _
Hulet M. Chaney, Director
John P. Tomlinson, III, Director
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ H. Terry Cook, Jr.________ __ _ 
/s/ William R. Walter_ __________
H. Terry Cook, Jr., Director
William R. Walter, Director
 
 
Date March 18, 2003_____________
Date March 18, 2003____________
 
 
 
 
. /s/ Tom Napier Gordon___________ 	
/s/ Dan C. Wheeler _____ _______
Tom Napier Gordon, Director	
Dan C. Wheeler, Director
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ Edwin W. Halliday_________ _
/s/ David S. Williams____ _ _ 
Edwin W. Halliday, Director
David S. Williams, Director
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ O. Rebecca Hawkins_______ __
/s/ W. Donald Wright_____ _ _ 
O. Rebecca Hawkins, Director
W. Donald Wright, Director
 
 
Date March 18, 2003____________
Date March 18, 2003____________
 
 
 
 
/s/ Waymon L. Hickman _ ______ _ 
 
Waymon L. Hickman, Director
 
 
 
Date March 18, 2003____________
 

	 

CERTIFICATION PURSUANT TO

18 U.S.C. 1350,

AS ADOPTED PURSUANT TO 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

	In connection with the Quarterly Report on Form 10-Q of First Farmers and Merchants Corporation and Subsidiary for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof , each of the undersigned certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S. C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) 
The Form 10Q complies with the requirement of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) 
The information contained in Form 10Q fairly presents, in all material respects, the financial condition and results of operation of First Farmers and Merchants Corporation and Subsidiary.

 

 

 

Date ______March 18, 2003____
/s/ T. Randy Stevens____
 
T. Randy Stevens,
 
President
 
(Chief Executive Officer)
 
 
 
 
Date _____March 18, 2003____
/s/ Patricia N. McClanahan__
 
Patricia N. McClanahan,
 
Treasurer
 
(Chief Financial Officer)
 

 

 

	
					

									

					 

FIRST FARMERS AND MERCHANTS CORPORATION

(Registrant)
**Certification - Chief Executive Officer

I certify that:

1)
I have reviewed this annual report on Form 10-K for First Farmers and Merchants Corporation;
2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4)
The registrant's other certifying officers and myself are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
 
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 5)
The registrant's other certifying officers and myself have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors:
 
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) 
The registrant's other certifying officers and myself have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including and corrective actions with regard to significant deficiencies and material weaknesses.
Date March 18, 2003____
/s/ T. Randy Stevens____
 
T. Randy Stevens,
 
President
 
(Chief Executive Officer)
 

FIRST FARMERS AND MERCHANTS CORPORATION

(Registrant)
**Certification - Chief Financial Officer

I certify that:

1)
I have reviewed this annual report on Form 10-K for First Farmers and Merchants Corporation;
2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4)
The registrant's other certifying officers and myself are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
 
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) 
The registrant's other certifying officers and myself have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors:
 
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
 
b)
any fraud, whether or not material that involves management or other employees who have a significant role in the registrant's internal controls; and
6) 
The registrant's other certifying officers and myself have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including and corrective actions with regard to significant deficiencies and material weaknesses.
.

Date March 18, 2003____
/s/ Patricia N. McClanahan____
 
Patricia N. McClanahan,
 
Executive Vice President
 
(Chief Financial Officer)
								

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, 2002

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, 2002, are incorporated by reference in Item 8:

	

Consolidated balance sheets -- December 31, 2002 and 2001
 
Consolidated statements of income -- Years ended December 31, 2002, 2001,

and 2000
 
Consolidated statements of changes in equity -- Years ended December 31, 2002, 2001, and 2000
 
Consolidated statements of cash flows -- Years ended December 31, 2002, 2001,

and 2000
 
Notes to consolidated financial statements -- December 31, 2002
 

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
99.1
Certifications pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
 
 
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
(13)
Annual Report to Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2002, 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 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, 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. Two offices, Martin House and West College, in Pulaski, Giles County were acquired in the first quarter of 2002. The Bank provides only automatic teller machine services in the Northfield Complex at the Saturn location near Spring Hill, in Columbia at the Tennessee Farm Bureau, Columbia State Community College, and Maury Regional Hospital, and in Marshall County at Marshall Plaza and Higgs Road. The financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.

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. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank has the largest market share 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 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 2002, 2001, and 2000; 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. 

During 2002, First Farmers and Merchants National Bank saw a 3.8% decline in net loans. Without the loans acquired in the acquisition of two locations of the Community Bank, an Alabama banking corporation, in Pulaski, Giles County, Tennessee in the first quarter, net loans declined 8.5%. Deposits grew 9.4%, half of which was related to deposits acquired in Pulaski.

Net income was down 19.7%. During the first quarter of 2002, the Bank changed the classification of specific commercial loans with documentation and structural deficiencies and retail loans with certain historical performance characteristics. Bank management determined that this change was necessary to reflect potential increased loss inherent to such loans. The effect of the change, which has been recognized currently as a change in accounting estimate, was to increase the provision for loan losses and decrease income before provision for income taxes by $4.4 million, $2.6 million, net of tax, or $.90 per share, for the year ended December 31, 2002.
**Summary

The Corporation reported net income of $8.5 million for 2002 compared to $10.6 million in 2001 and $8.3 million in 2000. On a per common share basis, net income was $2.92 for 2002 versus $3.63 for 2001 and $2.85 for 2000. The decline in 2002's earnings resulted primarily from the Bank's change in the accounting estimate of the provision for loan losses. 

The return on beginning equity for 2002 was 9.49% compared to 13.29% for 2001 and 11.55% for 2000. The return on average assets was .96% for 2002 versus 1.36% for 2001 and 1.30% for 2000.
**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.

 
**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 Rate and Interest Differential

** **YEAR ENDED DECEMBER 31,** ** **2002** ** ** 
 
 
 
 
2001
 
 
 
 
 
 
 
2000
 
 
 
 **Average**Rate/
Average
Rate/
Average
Rate/**Balance**Yield**Interest
Balance
Yield
Interest
Balance
Yield
Interest
ASSETS
(Dollars In Thousands)
Interest earning assets
Loans, net**$**513,553**7.28**%**$**37,411
*
$
462,725
8.49
%
$
39,272
*
$
349,727
8.99
%
$
31,432
*
Bank deposits**273**2.56**7
625
6.56
41
626
6.55
41
Taxable securities**210,974**5.49**11,578
172,929
6.10
10,556
170,972
6.10
10,430
Tax exempt securities**65,173**6.57**4,283
*
69,926
6.34
4,430
*
64,077
6.31
4,042
*
Federal funds sold**18,476**1.58**292
8,238
3.87
319
8,918
6.25
557
TOTAL EARNING ASSETS**808,449**6.63**$**53,571
714,443
7.64
$
54,618
594,320
7.82
$
46,502
Noninterest earning assets
Cash and due from banks**28,946
24,509
21,578
Bank premises and equipment**12,781
9,762
8,262
Other assets**40,349
30,141
16,636
TOTAL ASSETS**$**890,525** ** ** ** ** 
 
$
778,855
 
 
 
 
 
 
$
640,796
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts **$**255,861**1.69**%**$**4,332
$
195,476
2.13
%
$
4,154
$
183,054
3.18
%
$
5,815
Savings**102,735**2.11**2,165
64,687
2.76
1,783
58,218
3.12
1,814
Time**222,206**3.46**7,698
231,370
5.5
12,724
182,979
5.79
10,599
Time over $100,000**97,182**3.68**3,572
92,450
5.49
5,077
54,057
6.03
3,258
TOTAL INTEREST BEARING DEPOSITS**677,984**2.62**17,767
583,983
4.06
23,738
478,308
4.49
21,486
Federal funds purchased and securities
sold under agreements to repurchase**2,474**1.01**25
3,401
3.47
118
1,297
6.09
79
Other short-term debt**604**2.32**14
648
4.48
29
624
6.09
38
TOTAL INTEREST BEARING LIABILITIES**681,062**2.61**$**17,806
588,032
4.06
$
23,885
480,229
4.50
$
21,603
Noninterest bearing liabilities
Demand deposits**107,718
96,369
78,077
Other liabilities**6,597
8,215
6,471
TOTAL LIABILITIES**795,377
692,616
564,777
Stockholders' equity**95,148
86,239
76,019
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY**$**890,525** ** ** ** ** 
 
$
778,855
 
 
 
 
 
 
$
640,796
 
 
 
 
 
 
Spread between combined rates earned and
combined rates paid***4.02**%
3.58
%
3.32
%
Net yield on interest-earning assets***4.42**%
4.30
%
4.19
%

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.
 
**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.

**2002 Compared to 2001
2001 Compared to 2000**Yield/**Net Increase
Yield/
Net Increase**Volume**Rate**(Decrease)
Volume
Rate
(Decrease)**Revenue earned on
Loans, net**$**4,315 **$ **(6,176)**$ **(1,861)
$ 
10,158 
$ 
(2,318)
$ 
7,840 
Bank deposits**(23)**(11)**(34)
-
-
-
Investment securities
Taxable securities**2,321 **(1,299)**1,022 
119 
7 
126 
Tax-free securities**(301)**154 **(147)
366 
22 
388 
Federal funds sold**396 **(423)**(27)
(42)
(196)
(238)
Total interest earning assets**6,708 **(7,755)**(1,047)
10,600 
(2,484)
8,116 **Interest paid on
NOW and money market accounts**1,286 **(1,108)**178 
395 
(2,056)
(1,661)
Savings deposits**1,050 **(668)**382 
202 
(233)
(31)
Time deposits**(504)**(4,522)**(5,026)
2,803 
(678)
2,125 
Time deposits over $100,000**260 **(1,765)**(1,505)
2,313 
(494)
1,819 
Federal funds purchased and securities
sold under agreements to repurchase**(32)**(61)**(93)
128 
(89)
39 
Short term debt**(2)**(13)**(15)
1 
(10)
(9)
Total interest-bearing funds**2,058 **(8,137)**(6,079)
5,842 
(3,560)
2,282 **Net interest earnings**$**4,650 **$ **382 **$ **5,032 
 
$ 
4,758 
$ 
1,076 
$ 
5,834 

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.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
Two graphs are included at this point in the material mailed to our stockholders. The first graph illustrates in thousands of dollars, the categories of average earning assets and the portion each category is of the total for the last three years. The second graph illustrates in thousands of dollars, the categories of average funding of earning assets and the portion each category is of the total for the last three years. The following tables illustrate the data in these graphs.

 

**Average Funding Earning Assets**Average Earning Assets
(In Thousands $)
(In Thousands $)
Interest-Bearing 
Noninterest-Bearing 
Loans
Securities
Other
Deposits 
Deposits 
Other **2002**513,553 **276,147 **18,749 **2002**677,984 **107,718 **9,675 
2001
462,725 
242,855
8,863 
2001
583,983 
96,369 
12,264 
2000
349,727 
235,049 
9,544 
2000
478,308 
78,077 
8,392 

 

Average earning assets increased 13.2% in 2002, 10.8% without an acquisition that occurred in the first quarter, compared to a 20.2% increase in 2001 and a 7.4% increase in 2000. An 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, 2002, average net loans represented 64% of average earning assets. Average net loans were up 10.9% in 2002, 32% of which was a result of the 2002 acquisition, compared to a 32.3% increase in 2001, 80% of which was a result of the 2001 acquisition, and a 9.7% increase in 2000. 

Average investments, including federal funds sold, 32% of average earning assets at December 31, 2002, increased 17.2% from year end 2001 compared to a 2.9% increase at the end of 2001 from year end 2000, and a 4.3% increase at the end of 2000 from year end 1999. In the first quarter of 2002, the Bank acquired two offices in Pulaski, Tennessee from an Alabama bank. Net loans of approximately $24 million and certain other assets were acquired. 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 14.34% growth during 2002, 21.5% growth during 2001, and 6.7% growth from 1999 to 2000. A portion of the growth in 2002 and 2001 was due to acquisitions in each year.

The bank's average deposits grew during the last three years reflecting a 15.5% growth during 2002, 3.8% from the Pulaski acquisition. Deposit liabilities of $35 million were assumed in the transaction. Deposits grew 22.3% during 2001, 79% of this growth is related to the Lewisburg acquisition. Deposit liabilities of $148 million were assumed in the transaction. Deposits experienced a 6.1% growth from 1999 to 2000. Interest rates continued to decline in 2002. Some customers moved money to interest-bearing transaction accounts until rates settled down. Interest-bearing transaction accounts increased 30.9% during 2002 compared to a 6.8% increase in 2001 and a 1.2% increase during 2000. Time deposits under $100,000 declined 3.9% during 2002. Time deposits over $100,000 increased 5.1% in 2002. Average savings deposits increased over 58.8% during 2002. Savings deposits have been strong historically providing a core, low cost, source of funding. However, the acquisitions contributed to this increase. The Bank's noninterest-bearing deposits have remained consistently strong and were 14.0% of average total deposits in 2002, 2001, and 2000. 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, 2002, the Bank had approximately $93.9 million of cash and due from banks, securities and other short-term investments maturing within one year compared to $70.9 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, 2002, the unused lines of credit were $45 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, 2002, if interest rates were to fall 300 basis points (3.0%) over the next twelve months, net interest income would be $778 thousand less than currently projected without interest rate movements. This would be a decline in net interest income of 2.2% 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, 2002, 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, 2002, 2001, and 2000 was 4.42%, 4.30%, and 4.19% respectively.
**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 eighteen of the Bank's offices. Depending primarily on the
**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, 2002
or Less
Months
Months
Year
Total
Earning assets
Bank time deposits
$
-
$ 
$ 
250 
$ 
39 
$ 
289 
Fed Funds sold
14,251 
-
-
-
14,251 
Taxable investment securities
9,061 
7,497 
21,889 
201,645 
240,092 
Tax-exempt investment securities
450 
2,242 
1,082 
56,053 
59,827 
Loans and leases, net of deferred fees
123,021 
49,614 
65,987 
261,894 
500,516 
Total earning assets
 
146,783 
 
59,353 
 
89,208 
 
519,631 
 
814,975 
Interest-bearing liabilities
NOW and money market accounts
37,033 
-
-
226,382 
263,415 
Savings
-
-
-
109,344 
109,344 
Time
45,394 
43,268 
68,681 
51,724 
209,067 
Time over $100,000
24,309 
21,406 
17,992 
28,076 
91,783 
Other short-term debt
2,586 
-
-
79 
2,665 
Total interest bearing liabilities
109,322 
64,674 
86,673 
415,605 
676,274 
Period gap
 
37,461 
 
(5,321)
 
2,535 
 
104,026 
$ 
138,701 
Cummulative gap 
$ 
37,461 
$ 
32,140 
$ 
34,675 
$ 
138,701 
 
 

Available-for-sale and held-to-maturity securities were combined in the taxable securities category for purposes of this table.**LOANS AND LOAN QUALITY (Continued)

amount of the loan, there are various approval levels including an Executive Committee of the Board of Directors that meets weekly.

The Bank has a 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. A review of all relationships aggregating $250 thousand and greater was completed in 2002. After this review, loans totaling $7.6 million, or 1.5 % of the portfolio, were classified as other assets especially mentioned. This compares to loans totaling $12.5 million so classified at December 31, 2001. Loans totaling $35.1 million, 7.0 % of the portfolio, were classified as substandard. This compares to loans totaling $17.8 million so classified at December 31, 2001. Loans totaling $.668 million, or .1 % of the portfolio, were classified as doubtful. This compares to $.5 million so classified at December 31, 2001. Management asserts that the allowance for loan losses is adequate at December 31, 2002.

On September 3, 2002, the Bank voluntarily entered into a written agreement with the Office of the Comptroller of the Currency. The agreement relates to asset quality and management and board oversight of the lending function. Management believes that the financial ramifications related to the agreement have been fully recorded. 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

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

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 $11.5 million at December 31, 2002, have been identified as impaired in accordance with the provisions of SFAS 114. They represent 2.3% of gross loans. Commercial loans comprised $1.5 million of the total, with loans secured by real estate accounting for $9.4 million, and installment loans $.5 million. Interest received on these loans during 2002 was $982,000, during 2001 was $345,000, and during 2000 was $584,000. 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 $489,000, $348,000, and $801,000 for the years ended December 31, 2002, 2001, and 2000 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)**2002
2001
2000
1999
1998
Average amount of gross loans outstanding
$**524,248 
$ 
468,861 
$ 
354,811 
$ 
323,374 
$ 
324,838 
Balance of allowance for possible loan
losses at beginning of year
$**6,707 
$ 
5,322 
$ 
4,818 
$ 
3,852 
$ 
2,943 
Balance from acquisition**536 
1,097 
-
218 
-
Loans charged off
Loans secured by real estate**1,549 
21 
190 
317 
619 
Commercial and industrial loans**580 
377 
50 
236 
1,041 
Loans to individuals**1,517 
652 
475 
578 
914 
TOTAL LOANS CHARGED OFF**3,646 
1,050 
715 
1,131 
2,574 
Recoveries of loans previously charged off
Loans secured by real estate**3 
12 
221 
41 
1 
Commercial and industrial loans**54 
17 
4 
17 
61 
Loans to individuals**271 
109 
94 
121 
121 
TOTAL RECOVERIES**328 
138 
319 
179 
183 
NET LOANS CHARGED OFF**3,318 
912 
396 
952 
2,391 
Provision charged to operating expenses**7,450 
1,200 
900 
1,300 
3,300 
BALANCE AT END OF YEAR
$**11,375 
$ 
6,707 
$ 
5,322 
$ 
4,418 
$ 
3,852 
Ratio of net charge-offs during the period 
to average gross loans outstanding
 **0.63%
0.19%
0.11%
0.29%
0.74%
 
**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, 2002, the Corporation had a ratio of tier 1 capital to average assets of 8.79%. This compares to a ratio of tier 1 capital to average assets of 9.08% at December 31, 2001, and 12.09% at December 31, 2000. The recent ratios are lower because identifiable intangibles related to the acquisitions reduced capital as average total assets increased.

Cash dividends declared in 2002 were 37% of net income. The Corporation plans to resume 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, 2002, the Corporation's ratios of Tier I capital to risk-weighted assets and total capital to risk-weighted assets were 14.4% and 15.7% respectively. At December 31, 2001, the comparable ratios were 14.2% and 15.4%, 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 on 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
1994
1995
1996
1997
1997
1998
1999
2000
2001**2002
37,454 
41,820 
46,755 
52,067 
57,806 
63,032 
63,032 
70,161 
76,019 
86,239 **95,148 
** 

RESULTS OF OPERATIONS

Interest Income

Total interest income decreased 2.2% in 2002. Interest and fees earned on loans was over 71% of gross interest income in 2002 and decreased 4.9%. Interest earned on securities and other investments increased 5.4% in 2002 making up the balance of gross interest income. Total interest income increased 17.5% in 2001 and 10.3% in 2000.
**Interest Expense

Total interest expense decreased 25.5% in 2002, compared to a 10.6% increase in 2001, and a 20.4% increase in 2000. A falling interest rate environment contributed to the decline in interest expense in 2002 and 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 4.42% at the end of 2002, 4.30% at the end of 2001, and 4.19% at the end of 2000.

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**
 

Two pie graphs are included at this point in the material mailed to our stockholders. The first graph represents in thousands of dollars, the categories of noninterest income in 2002 and the percentage each category is of the total. The second graph illustrates in thousands of dollars, the categories of noninterest expense and the percentage each category is of the total in 2002. The following tables illustrate the data in these graphs.

**2002 Noninterest Income
(In Thousands $)
Trust
1,781
18%
Other service fees
435
4%
Deposit fees
7,175
71%
Other
736
7%
**2002 Noninterest Expense
(In Thousands $)
Personnel
13,045
50%
Occupancy
2,187
8%
Other
9,515
36%
Equipment
1,461
6%
 
** 

 

 

 

 

 

Noninterest Income and Expense

Noninterest income increased .9% during 2002 due mostly to income from service fees on deposit relationships strengthened by new products and acquisitions.Noninterest income increased 26.4% in 2001 and 10.3% in 2000.
Noninterest expenses, excluding the provision for possible loan losses, increased 12.8% in 2002. Increases in net occupancy expense and furniture and equipment expense related to the acquisition contribute to this increase. Noninterest expenses increased 21.8% in 2001 and 5.9% increase in 2000.
**Net Income

Net income was 19.7% lower in 2002 than in 2001. During the first quarter of 2002, the Bank changed the classification of specific commercial loans with documentation and structural deficiencies and retail loans with certain historical performance characteristics. Bank management determined that this change was necessary to reflect potential increased loss inherent to such loans. The effect of the change, which has been recognized currently as a change in accounting estimate, was to increase the provision for loan losses and decrease income beforeprovision for income taxes by $4.4 million, $2.6 million, net of tax, or $.90 per share, for the year ended December 31, 2002. Net income was 27.5% higher in 2001 than in 2000. The acquisition that year contributed to the increase in net income. Net income for 2000 was 10.5% higher than 1999.
 
**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. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-lived Assets" which supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" and the accounting and reporting provisions for the disposal of a business segment of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. " The Bank adopted the provisions of SFAS No. 144 on January 1, 2002. Adoption of this new standard did not have a material effect on the financial position or results of operations of the Corporation and the Bank.
On July 30, 2002 the FASB issued Statement of Financial Accounting Standards Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities " (SFAS No. 146). The standard replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management believes adoption of this new standard will have no effect on the financial position or results of operations of the Corporation or the Bank.
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL

STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD

In November, 2002, the FASB issued Interpretation No. 45, *Guarantor's Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statement No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34.*This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The initial recognition and measurement provisions of the Interpretation are not expected to have a material effect on the Bank's financial statements. 

 
**CRITICAL ACCOUNTING POLICIES

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses (ALLL) and the recognition of our deferred income tax assets, have been critical to the determination of our financial position, results of operations, and cash flows.
**Allowance for Loan Losses

Our management assesses the adequacy of the ALLL prior to the end of each month with a more formal review that is prepared quarterly to assess the risk in the loan portfolio. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALLL represents calculated amounts for specifically identified credit exposure and exposures readily predictable by historical or comparative experience. Even though this calculation considers specific credits, the entire allowance is available to absorb any credit losses. 

These calculated amounts are determined by assessing loans identified as not in compliance with loan agreements. These loans are generally in two different risk groups. One group is unique loans (commercial loans, including those loans considered impaired). The second group is homogenous loans (generally retail loans). The calculation for unique loans is based primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Each risk-rating grade is assigned a loss ratio, which is determined based on the experience of management, discussions with banking regulators, and the independent loan review process. The amount allocated for impaired loans is based on estimated cash flows discounted at the loan's original effective interest rate or the underlying collateral value. The allocated amount relating to our retail portfolio is currently a function of regulatory review. Historical data, including actual loss experience on such loans, is being accumulated by the category of consumer credit and performance characteristics. 

Criteria considered in evaluating the adequacy of the ALLL are:
- Changes in credit policy, credit administration, portfolio management and procedures; 
- Present and prospective economic and business conditions, locally and nationally;
- Changes in the nature and volume of the portfolio;
- Changes in personnel, management, and staff;
- Portfolio quality trends; and 
- Management review systems and board oversight, including external loan review processes.

In assessing the adequacy of the ALLL, the risk characteristics of the entire loan portfolio are evaluated. This process includes the judgment of management, input from independent loan reviews, and reviews that may have been conducted by bank regulators as part of their usual examination process.
**Deferred Income Tax Assets

Deferred tax assets consist mainly of the tax effect of excess provisions for loan losses over actual losses incurred and deferred compensation. The Corporation and the Bank have paid taxes for many years. Management believes that it is more likely than not that we will realize these assets in future years.
**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**2002
2001
2000
1999
1998
Interest Income
Interest and fees on loans
$**37,116 
$ 
39,031 
$ 
31,358 
$ 
28,017 
$ 
29,155 
Income on investment securities
Taxable interest**11,390 
10,218 
10,097 
9,443 
7,326 
Exempt from federal income tax**3,214 
3,420 
3,108 
2,877 
2,583 
Dividends**166 
307 
278 
257 
300 **14,770 
13,945 
13,483 
12,577 
10,209 
Other interest income**299 
359 
598 
620 
689 
Total Interest Income**52,185 
53,335 
45,439 
41,214 
40,053 
Interest Expense
Interest on deposits**17,767 
23,738 
21,486 
17,918 
17,414 
Interest on other short term borrowings**39 
147 
117 
32 
30 
Total Interest Expense**17,806 
23,885 
21,603 
17,950 
17,444 
Net Interest Income**34,379 
29,450 
23,836 
23,264 
22,609 
Provision For Possible Loan Losses**7,450 
1,200 
900 
1,700 
3,300 
Net Interest Income After 
Provision for Loan Losses**26,929 
28,250 
22,936 
21,564 
19,309 
Noninterest Income
Trust department income**1,781 
1,862 
1,813 
1,670 
1,516 
Service fees on deposit accounts**7,175 
6,822 
5,136 
4,115 
3,669 
Other service fees, commissions, and fees**435 
537 
422 
727 
1,043 
Other operating income**611 
758 
566 
555 
985 
Securities gains**124 
54 
- 
130 
351 
Total Noninterest Income**10,126 
10,033 
7,937 
7,197 
7,564 
Noninterest Expense
Salaries and employee benefits**13,045 
11,567 
9,711 
8,645 
7,776 
Net occupancy expense**2,187 
1,765 
1,485 
1,524 
1,356 
Furniture and equipment expense**1,461 
928 
1,192 
1,251 
1,472 
Other operating expenses**9,515 
8,980 
6,780 
6,675 
5,816 
Total Noninterest Expense**26,208 
23,240 
19,168 
18,095 
16,420 
Income Before Provision
For income Taxes**10,847 
15,043 
11,705 
10,666 
10,453 
Provision For Income Taxes**2,329 
4,430 
3,379 
3,133 
3,112 
Net Income
$**8,518 
$ 
10,613 
$ 
8,326 
$ 
7,533 
$ 
7,341 
Earnings Per Common Share
$**2.92
$
3.63
$
2.85
$
2.59
$
2.62
Weighted average shares outstanding**2,920,000 
2,920,000 
2,920,000 
2,908,493 
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
 
 
Nashville, Tennessee
February 14, 2003
 

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, 2002. 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, 2002, the Corporation maintained an effective internal control system over financial reporting presented in conformity with accounting principles generally accepted in the United States of America.

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, 2002.

 

 

/s/ T. Randy Stevens
/s/ Patricia N. McClanahan
T. Randy Stevens
Patricia N. McClanahan
President and
Executive Vice President
Chief Executive Officer
Chief Financial Officer
February 14, 2003

 

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, 2002, 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 14, 2003
 

 

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 AND SUBSIDIARY**CONSOLIDATED BALANCE SHEETS**December 31,
December 31,
 
(Dollars In Thousands, Except Per Share Data)
 **2002
 
2001
ASSETS 
Cash and due from banks 
$ **37,161 
$ 
30,648 
Interest-bearing deposits in banks **289 
16 
Federal funds sold **14,251 
- 
Total cash and cash equivalents **51,701 
30,664 
Securities 
Available-for-sale (amortized cost $197,402 
and $113,550 respectively) **207,666 
117,218 
Held-to-maturity (fair value $108,087 
and $126,244 respectively) **102,517 
123,234 
Total securities - Note 2 **310,183 
240,452 
Loans, net of deferred fees - Note 3 **500,516 
515,178 
Allowance for possible loan losses - Note 4 **(11,375)
(6,707)
Net loans **489,141 
508,471 
Bank premises and equipment, at cost 
less allowance for depreciation - Note 5 **13,051 
10,978 
Other assets **34,820 
30,926 
 
TOTAL ASSETS 
$ **898,896 
$ 
821,491 **LIABILITIES 
Deposits 
Noninterest-bearing 
$ **115,578 
$ 
111,432 
Interest-bearing (including certificates of deposit 
over $100,000: 2002 - $91,783; 2001 - $98,272) **673,609 
610,084 
Total deposits **789,187 
721,516 
Federal funds purchased and securities sold 
under agreements to repurchase **1,986 
1,802 
Dividends payable **1,577 
1,518 
Other short term liabilities **679 
708 
Accounts payable and accrued liabilities **5,785 
6,159 
 
TOTAL LIABILITIES 
 **799,214 
 
731,703 **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 **59,389 
53,995 
Accumulated other comprehensive income **6,773 
2,273 
TOTAL STOCKHOLDERS' EQUITY **99,682 
89,788 
TOTAL LIABILITIES AND 
 
STOCKHOLDERS' EQUITY 
$ **898,896 
$ 
821,491 
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, 
 **2002
 
2001
 
2000**INTEREST & DIVIDEND INCOME
Interest and fees on loans
$**37,116
$
39,031
$
31,358
Income on investment securities
Taxable interest**11,390
10,218
10,097
Exempt from federal income tax**3,214
3,420
3,108
Dividends**166
307
278**14,770
13,945
13,483
Other interest income**299
359
598** 
TOTAL INTEREST & DIVIDEND INCOME
 **52,185
 
53,335
 
45,439**INTEREST EXPENSE 
Interest on deposits**17,767
23,738
21,486
Interest on other short term borrowings**39
147
117
TOTAL INTEREST EXPENSE**17,806
23,885
21,603
NET INTEREST INCOME**34,379
29,450
23,836
PROVISION FOR POSSIBLE
LOAN LOSSES - Note 4**7,450
1,200
900
NET INTEREST INCOME AFTER** 
PROVISION FOR LOAN LOSSES
 **26,929
 
28,250
 
22,936**NONINTEREST INCOME
Trust department income**1,781
1,862
1,813
Service fees on deposit accounts**7,175
6,822
5,136
Other fees and commissions**435
537
422
Other operating income**611
758
566
Securities gains**124
54
-** 
TOTAL NONINTEREST INCOME
 **10,126
 
10,033
 
7,937**NONINTEREST EXPENSES
Salaries and employee benefits**13,045
11,567
9,711
Net occupancy expense**2,187
1,765
1,485
Furniture and equipment expense**1,461
928
1,192
Other operating expenses**9,515
8,980
6,780
TOTAL NONINTEREST EXPENSES**26,208
23,240
19,168
INCOME BEFORE PROVISION FOR
INCOME TAXES**10,847
15,043
11,705** 
PROVISION FOR INCOME TAXES - Note 8
 **2,329
 
4,430
 
3,379** 
NET INCOME 
$**8,518
$
10,613
$
8,326**EARNINGS PER SHARE
Common Stock - Note 1
(Weighted average shares outstanding:** 
2,920,000)
$**2.92
$
3.63
$
2.85
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, 2002, 2001, and 2000
 
Stock
 
Capital
 
Earnings
 
Income (Loss)
 
Total
BALANCE AT JANUARY 1, 2000
$
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 
Comprehensive income
Net income**8,518 **8,518 
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification 
adjustment and tax effects**4,500 **4,500 
Total comprehensive income**13,018 
Cash dividends declared, $1.07 per share
 ** ** ** ** **(3,124)** ** ** **(3,124)
BALANCE AT DECEMBER 31, 2002
$**29,200 **$ **4,320 **$ **59,389 **$ **6,773 **$ **99,682 
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,
 **2002
 
2001
 
2000**OPERATING
Net income
$**8,518 
$ 
10,613 
$ 
8,326 **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**4,132 
288 
504 
Provision for depreciation and amortization of
premises and equipment**1,313 
876 
1,124 
Provision for depreciation of leased equipment**-
150 
300 
Amortization of intangibles**1,021 
1,066 
271 
Amortization of investment security premiums,
net of accretion of discounts**1,112 
500 
635 
Increase in cash surrender value of life insurance contracts**(460)
(271)
(257)
Deferred income taxes**(1,312)
(83)
(312)
(Increase) decrease, net of effects from acquisitions, in
Interest receivable**39 
483 
(440)
Other assets**792 
(1,339)
543 
Increase (decrease), net of effects from acquisitions, in
Interest payable**(1,563)
(1,446)
1,094 
Other liabilities**999 
391 
(115)
Total Adjustments**6,073 
615 
3,347 ** 
Net cash provided by operating activities
 **14,591 
 
11,228 
 
11,673 **INVESTING
Proceeds from maturities, calls, and sales of**ACTIVITIES
available-for-sale securities**35,232 
27,995 
27,408 
Proceeds from maturities and calls of held-to-maturity securities**20,674 
17,825 
8,167 
Purchases of investment securities
Available-for-sale**(120,028)
(26,594)
(9,995)
Held-to-maturity**-
(11,802)
(13,378)
Net (increase) decrease in loans, net of effects from acquisitions**38,454 
(25,621)
(41,093)
Purchases of premises and equipment, net of effects from acquisitions**(1,531)
(2,119)
(895)
Purchase of single premium life insurance contracts**(3,970)
(425)
(600)
Net increase in cash from acquisitions**8,017 
3,457 
-** 
Net cash used by investing activities
 **(23,152)
 
(17,284)
 
(30,386)**FINANCING
Net increase in noninterest-bearing and interest-bearing deposits,**32,509 
16,854 
15,995 **ACTIVITIES
Net increase (decrease) in short term borrowings**155 
(5,777)
7,182 
Cash dividends**(3,066)
(2,394)
(2,131)** 
Net cash provided by financing activities
 **29,598 
 
8,683 
 
21,046 
Increase in cash and cash equivalents**21,037 
2,627 
2,333 
Cash and cash equivalents at beginning of period**30,664 
28,037 
25,704 ** 
Cash and cash equivalents at end of period
$**51,701 
$ 
30,664 
$ 
28,037 
Supplemental disclosures of cash flow information
Cash paid during the period for expenses
Interest on deposits and borrowed funds
$**19,183 
$ 
24,200 
$ 
20,509 ** 
Income taxes
 **4,433 
 
4,589 
 
3,827 
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 full-service commercial banking business through twenty-one offices in its community service area which is comprised of Maury, Lawrence, Marshall, Hickman, Dickson, Giles, and adjacent counties in southern middle Tennessee. The Bank owns one hundred percent of F & M West, a 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 accounting principles generally accepted in the United States of America 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 wholly-owned subsidiary, the Bank, and the Bank's wholly-owned 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 accounting principles generally accepted in the United States of America 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, 2002, approximately $6 million was required to be maintained at the Federal Reserve Bank. Interest-bearing 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 one-day periods. Interest-bearing 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 2002 or 2001.

Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of deferred tax, excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary are included in earnings as realized losses. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method. 
**Loans Held For Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. 
**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 past-due 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 losses are charged against the allowance when management determines that the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance account in the period received. 

At March 31, 2002, pursuant to discussions with federal bank examiners and changes in the economic outlook, both generally and in the Bank's geographical region, the Bank changed the classification of specific commercial loans with documentation and structural deficiencies and retail loans with certain historical performance characteristics. Bank management determined that this change was necessary to reflect potential increased loss inherent to such loans. The change has been recognized currently as a change in accounting estimate.

The adequacy of the allowance for possible loan losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, loan administration, and a Board of Directors oversight committee. 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. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 

Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.. The Bank evaluates smaller balance homogeneous loans collectively for impairment. Loans secured by one to four family residential properties, consumer installment loans, and line of credit loans are considered smaller-balance homogeneous loans**.
Other Real Estate

Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of fair value, net of estimated selling costs, or cost, at the date of foreclosure. If, at the time of foreclosure, the fair value of the real estate is less than the Bank's carrying value of the related loan, a write-down is recognized through a charge to the allowance for possible loan losses, and the fair value becomes the new cost for subsequent accounting. If the Bank later determines that the cost of the property cannot be recovered through sale or use, a write-down is recognized by a charge to operations. 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Other Real Estate (Continued)

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 $862,000 at December 31, 2002, and $873,000 at December 31, 2001.
**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 $28.1 million and $27.9 million at December 31, 2002 and 2001, 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.

 

Years Ended December 31,**2002
2001
2000
Unrealized holding gains (losses)
on available-for-sale securities**$**6,729 
$ 
3,506 
$ 
2,623 
Reclassification adjustment for losses
(gains) realized in income**(124)
(54)
-
Tax effect - (expense) benefit**(2,105)
(1,312)
(997)
Other comprehensive income**$**4,500 
$ 
2,140 
$ 
1,626 

Table I - Components of Other Comprehensive Income

Dollars in Thousands

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2002, 2001, and 2000, there were no potentially dilutive common shares issuable.**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 available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. A schedule of other comprehensive income is shown in Table I above.
**Intangible Assets

Effective January 1, 2002, the Bank adopted Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets,*(SFAS 142). SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets with indefinite lives. As a result of adopting SFAS 142, goodwill is no longer amortized. Pursuant to SFAS 142, intangible assets must be periodically tested for impairment and the new standard provides six months to complete the impairment review. During fiscal 2002 the Bank completed its impairment review, which indicated that there was no impairment.

Another provision of SFAS 142 is a requirement to disclose what reported net income would have been in all periods presented exclusive of amortization expense (net of related income tax effects) recognized in those periods related to goodwill no longer being amortized. Table II shows this adjusted net income with related per share amounts. Deposit base intangibles that will continue to be amortized over 42 to 180 months on the straight-line method. Total amortization expense charged to operations amounted to: 2002 - $1,021,000; 2001 - $1,095,000; and 2000 - $271,000. Note 11 discusses current acquisitions.**Segment Reporting

Segments are strategic business units that offer different products and services and are managed separately. At December 31, 2002, the Corporation and the Bank did not have any identified segments.

Year Ended December 31**2002
2001
2000
Reported net income
$**8,518 
$ 
10,613 
$ 
8,326 
Add goodwill amortization**-
520 
148 
Tax effect - (expense) benefit**-
(198)
(56)
Adjusted net income
$**8,518 
$ 
10,935 
$ 
8,418 
Basic earnings per share
$**2.92 
$ 
3.63 
$ 
2.85 
Add goodwill amortization**-
0.18 
0.05 
Tax effect - (expense) benefit**-
(0.07)
(0.02)
Adjusted earnings per share
$**2.92 
$ 
3.74 
$ 
2.88 

Table II - Net Income Exclusive of Amortization of Goodwill

Dollars in Thousands Except Per Share Data

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SECURITIES**
Securities with an amortized cost of $124,670,000 and $103,149,000 at December 31, 2002 and 2001, respectively (fair value: 2002 - $132,759,000; 2001 - $107,487,000), 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, 2002, 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, 2002
Available-for-sale securities
U.S. Treasury**$**2,089 **$ **117 **$ **-**$ **2,206 
U.S. Government agencies**159,258 **9,418 **-**168,676 
Mortgage backed securities**31,245 **646 **-**31,891 
Other securities**4,810 **86 **3 **4,893 
 **$**197,402 **$ **10,267 **$ **3 **$ **207,666 
Held-to-maturity securities
U.S. Government agencies**$**30,121 **$ **1,573 **$ **-**$ **31,694 
States and political subdivisions**59,827 **2,809 **-**62,636 
Other securities**12,569 **1,188 **-**13,757 
 **$**102,517 **$ **5,570 **$ **-**$ **108,087 
December 31, 2001
Available-for-sale 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 
Held-to-maturity 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 

Table III - 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, 2002, 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 IV shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 2002, by contractual maturity. Expected maturities may differ from contractual maturities****because issuers may have****the right to call or prepay obligations.

Proceeds from the maturity, call, or sale of available-for-sale securities were $35,232,000, $27,995,000, and $27,408,000 during 2002, 2001, and 2000, respectively. Proceeds from the maturity or call of held-to-maturity securities were $20,674,000, $17,825,000, and $8,167,000 during 2002, 2001, and 2000, respectively. Gross gains of $124,000 and $54,000 were realized on dispositions in 2002 and 2001, respectively. There were no gains or losses realized on the dispositions in 2000.

Cost**Value
(Unaudited)**Available-for-sale securities
U.S. Treasury
After one but within five years
$
2,089
$**2,206
4.1%
U.S. Government agencies
Within one year
14,006**14,333
5.6%
After one but within five years
137,482**145,750
4.6%
After five but within ten years
7,770**8,593
5.6%
Mortgage backed securities
Within one year
9,938**10,123
5.2%
After one but within five years
21,027**21,481
4.2%
After five but within ten years
280**287
5.5%
Other securities 
Within one year
1,000**1,000
1.5%
After one but within five years
506**515
3.6%
After five but within ten years
329**393
11.0%
After ten years
2,975**2,985
6.9%
 
$
197,402
$**207,666**Held-to-maturity securities
U.S. Government agencies
Within one year
$**12,010
$
12,189
6.2%
After one but within five years**18,111
19,505
6.4%
States and political subdivisions
Within one year**3,774
3,814
6.6%
After one but within five years**10,489
10,969
7.0%
After five but within ten years**23,482
24,675
7.2%
After ten years**22,082
23,178
7.5%
Other securities
Within one year**1,493
1,520
6.7%
After one but within five years**7,215
7,828
6.6%
After five but within ten years**3,861
4,409
7.3%
 
$**102,517
$
108,087

Table IV - 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**

**2002
2001
Commercial, financial and agricultural
$**75,904
$
74,491
Tax exempt municipal loans**9,387
9,687
Real estate
Construction**15,382
11,734
Commercial mortgages**127,382
129,600
Residential mortgages**201,568
214,101
Other**22,258
18,188
Consumer loans**44,955
53,144
Lease financing receivables**3,958
4,514**500,794
515,459
Less:
Net unamortized loan origination fees**(278)
(281)
Allowance for possible loan losses**(11,375)
(6,707)
 
$**489,141
$
508,471

Table V - Loans Outstanding by Category at December 31, 2002 and 2001

Dollars in Thousands

Within
One to
After 
One Year
Five Years
Five Years
Total
Commercial, financial and agricultural**$ **52,578**$ **19,486**$ **3,840**$ **75,904
Tax exempt municipal loans**511**4,912**3,964**9,387
Real estate
Construction**12,709**2,463**210**15,382
Commercial mortgages**54,266**50,774**22,342**127,382
Residential mortgages**80,817**81,347**39,404**201,568
Other**7,010**9,098**6,150**22,258
Consumer loans**30,522**14,230**203**44,955
Lease financing receivables**209**2,188**1,561**3,958
Total**$ **238,622**$ **184,498**$ **77,674**$ **500,794

Table VI - Loan Maturities and Repricings at December 31, 2002

(Unaudited)

Dollars in Thousands

Loans having recorded investments of $11,534,000 at December 31, 2002, have been identified as impaired and are not accruing interest. The total allowance for possible loan losses related to these loans was $1,964,000. Interest received on these loans during 2002 was $982,000, during 2001 was $345,000, and during 2000 was $584,000. Impaired loans had recorded investments of approximately $5,619,000 at December 31, 2001, with $650,000 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, 2002 and 2001, is shown in Table VII 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 2002 or 2001.
**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**2002**Aggregate of certain party loans**$**4,183**$**1,855**$**3,075**$**2,963
2001
Aggregate of certain party loans
$
3,047
$
6,469
$
5,333
$
4,183

Table VII - Analysis of Activity in Certain Party Loans

Dollars in Thousands
** 

NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES

**2002
2001
2000
Balance at beginning of year
$**6,707 
$ 
5,322 
$ 
4,818 
Increase due to acquisition**536 
1,097 
-
Provision charged to operating expenses**7,450 
1,200 
900 
Loan losses:
Loans charged off**(3,646)
(1,050)
(715)
Recoveries on loans previously 
charged off**328 
138 
319 
Balance at end of year
$**11,375 
$ 
6,707 
$ 
5,322 

Table VIII - Changes in the Allowance for Possible Loan Losses

Dollars in Thousands

At March 31, 2002, pursuant to discussions with federal bank examiners and changes in the economic outlook, both generally and in the Bank's geographical region, the Bank changed the classification of specific commercial loans with documentation and structural deficiencies and retail loans with certain historical performance characteristics. Bank management determined that this change was necessary to reflect potential increased loss inherent to such loans. The effect of the change, which has been recognized currently as a change in accounting estimate, was to increase the provision for loan losses and decrease income before provision for income taxes by $4.4 million, $2.6 million, net of tax, or $.90 per share, for the year ended December 31, 2002.

On September 3, 2002, the Bank voluntarily entered into a written agreement with the Office of the Comptroller of the Currency. The agreement relates to asset quality and management and board oversight of the lending function. Management believes that the financial ramifications related to the agreement have been fully recorded. However, the allowance may be increased or decreased based on loan growth, changes in credit quality, and changes in general economic conditions. In the opinion of management, based on conditions reasonably known, the allowance was adequate at December 31, 2002.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - BANK PREMISES AND EQUIPMENT**

**2002
2001
Land
$**2,010 
$ 
1,714 
Premises**13,533 
12,108 
Furniture and equipment**7,177 
6,023 
Leasehold improvements**1,422 
1,236 **24,142 
21,081 
Less allowance for depreciation and amortization**(11,091)
(10,103)
 
$**13,051 
$ 
10,978 

Table IX - Premises and Equipment at December 31, 2002 and 2001

Dollars in Thousands

Annual provisions for depreciation and amortization of bank premises and equipment total $1,313,000 for 2002, $876,000 for 2001, and $1,124,000 for 2000. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling approximately $3,234,000 at December 31, 2002. 
**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, 2002, additional dividends of approximately $19.3 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 short-term leases with terms of less than one month, amounted to $42,000, $33,000, and $32,000 for equipment leases, and $129,000, $140,000, and $143,000 for building leases, in 2002, 2001, and 2000, respectively. Future minimum lease commitments as of December 31, 2002, under all noncancelable operating leases with initial terms of one year or more are shown in

Table IX.

Lease
Year 
Payments
2003
$
104 
2004
110 
2005
110 
2006
110 
2007
56 
Thereafter
27 
Total
$
517 

Table X - 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**

**2002
2001
2000
Current:
Federal**$**3,623 
$ 
3,625 
$ 
2,954 
State**18
889 
737 
Total current**3,641 
4,514 
3,691 
Deferred:
Federal**(1,109)
(66)
(265)
State**(203)
(18)
(47)
Total deferred**(1,312)
(84)
(312)
Total provision for income taxes**$**2,329 
$ 
4,430 
$ 
3,379 

Table XI - Provisions for Income Taxes

Dollars in Thousands

 

**2002
2001
2000
Allowance for possible loan losses**$ **4,188 
$ 
2,132 
$ 
2,023 
Deferred compensation**879 
800 
704 
Write down of other real estate**44 
-
-
Deferred loan fees**1 
3 
5 
Deferred tax asset**5,112 
2,935 
2,732 
Unrealized gain on AFS securities**(3,490)
(1,385)
(82)
Lease financing depreciation, net of rent**(557)
(107)
Accelerated depreciation**(78)
-
-
Amortization of goodwill**(221)
-
-
Other**(455)
(339)
(327)
Deferred tax liability**(4,801)
(1,831)
(409)
Net deferred tax asset**$ **311 
$ 
1,104 
$ 
2,323 

Table XII - 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

**2002
2001
2000
Tax expense at statutory rate
$**3,688 
$ 
5,114 
$ 
3,980 
Increase (decrease) in taxes resulting from:
Tax-exempt interest**(1,288)
(1,325)
(1,157)
Nondeductible interest expense**142 
191 
164 
Employee benefits**(156)
(92)
(87)
Amortization of goodwill**-
50 
50 
Other nondeductible expenses
(nontaxable income) - net**16 
14 
13 
State income taxes, net of federal
tax benefit**(122)
586 
479 
Dividend income exclusion**(11)
(33)
(26)
Other**60 
(75)
(37)
Total provision for income taxes
$**2,329 
$ 
4,430 
$ 
3,379 
Effective tax rate
 **21.5%
 
29.5%
 
28.9%

Table XIII - Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed

at the Federal Statutory Rate (34% Each Year)

Dollars in Thousands

 

 

 

 
**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 off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.

The total outstanding loan commitments and standby letters of credit in the normal course of business at December 31, 2002, were approximately $51 million and $6 million, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are****conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.

The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. 

On September 3, 2002, the Bank voluntarily entered into a written agreement with the Office of the Comptroller of the Currency. The agreement relates to asset quality and management and board oversight of the lending function. A Compliance Committee of the Board of Directors was formed that meets regularly to monitor and coordinate adherence to the agreement. Management believes that the financial ramifications related to the agreement have been fully recorded.

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 risk-adjusted capital adequacy standards. Failure to meet capital adequacy requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that could have a direct material effect on the consolidated financial statements of the Corporation and the Bank. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Capital and Tier 1 Capital to risk-weighted assets and of Tier 1 Capital to average assets. The written agreement with the Office of the Comptroller of the Currency relating to asset quality and management and board oversight of the lending function included two capital ratio requirements. These were a minimum Tier 1 Capital to Risk Weighted Assets ratio of 11.5% and a minimum Tier 1 Capital to Adjusted Total Assets ratio of 8%. Management believes, as of December 31, 2002 and 2001, that the Corporation and the Bank met all capital adequacy requirements to which they were subject. 

Actual capital amounts and ratios are presented in Table XIV.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 
**NOTE 10 - SHAREHOLDERS' EQUITY**(Continued)**

For Capital
For Regulatory
Actual
Adequacy Purposes
Compliance Purposes
As of December 31, 2002
Amount
Ratio
Amount
Ratio > or =
Amount
Ratio > or =
Total Capital (to Risk Weighted
Assets) Consolidated**$**85,522**15.67%**$**43,673**8.00%**$**-**-
Bank**84,170**15.47%**43,530**8.00%**54,412**10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated**78,642**14.41%**21,837**4.00%**-**-
Bank**77,312**14.21%**21,765**4.00%**62,574**11.50%
Tier I Capital (to Average
Assets) Consolidated**78,642**8.79%**35,770**4.00%**-**-
Bank**77,312**8.75%**35,334**4.00%**44,167**5.00%
Tier I Capital (to Adjusted Total
Assets) Bank**77,312**10.76%**-**-**57,485**8.00%
As of December 31, 2001
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%
Table XIV - Capital Amounts and Capital Adequacy Ratios

Dollars in Thousands
**NOTE 11 - ACQUISITIONS**
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 straight-line 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

 

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 
**NOTE 11 - ACQUISITIONS (Continued)**

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. Regulatory approval was received and the acquisition was completed March 29, 2002. The fair values of identifiable assets acquired and liabilities assumed are presented in Table XVII. In addition, a core deposit intangible of $1,573,000 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 those branches are included in the consolidated financial statements from the acquisition date. The pro forma effect of the new Pulaski branches on operations if the acquisition had occurred at January 1, 2002, was not significant.

Cash 
$ 
8,017 
Deposits 
$ 
35,162 
Loans, net 
23,256 
Other liabilities 
191 
Premises and equipment 
1,856 
Other assets 
 
652 
 
 
 
 

Table XVII - Assets and Liabilities Acquired Through Acquisition

Dollars in Thousands

 

 

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS**

**December 31, 2002
December 31, 2001**Carrying**Fair
Carrying
Fair**Amount**Value
Amount
Value
Financial assets
Cash and due from banks
$**37,161 **$ **37,161 
$ 
30,648 
$ 
30,648 
Interest-bearing deposits in banks**289 **289 
16 
16 
Federal funds sold**14,251 **14,251 
-
-
Securities available-for-sale**207,666 **207,666 
117,218 
117,218 
Securities held-to-maturity**102,517 **108,087 
123,234 
126,244 
Loans, net**489,141 **537,370 
508,471 
542,026 
Accrued interest receivable**7,000 **7,000 
6,836 
6,836 
Financial liabilities
Deposits**789,187 **795,010 
721,516 
725,249 
Federal funds purchased and
securities sold under agreements
to repurchase**1,986 **1,986 
1,802 
1,802 
Other short term liabilities**679 **679 
708 
708 
Accrued interest payable
 **2,267 ** **2,267 
 
3,643 
 
3,643 

Table XVIII - 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 available-for-sale and securities held-to-maturity are valued by an independent rating service and are disclosed in detail in Note 2 above. A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. For loans with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances.
**Financial liabilities - Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. For deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. The carrying amount of other short term borrowings is considered to approximate its fair value.

The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently 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, 2002, the Bank had outstanding standby letters of credit and commitments to extend credit. These off-balance-sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed and, therefore, are deemed to have no current fair value. Please refer to Note 9. 
 
**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**2002
Interest income
$**12,788 **$ **13,579 **$ **13,198 **$ **12,620 **$ **52,185 
Interest expense**4,627 **4,663 **4,538 **3,978 **17,806 
Net interest income**8,161 **8,916 **8,660 **8,642 **34,379 
Provision for possible loan losses **5,300 **350 **400 **1,400 **7,450 
Noninterest expenses, net of
noninterest income**3,469 **3,955 **4,241 **4,417 **16,082 
Income before income taxes**(608)**4,611 **4,019 **2,825 **10,847 
Income taxes**(653)**1,249 **1,099 **634 **2,329 
Net income
$**45 **$ **3,362 **$ **2,920 **$ **2,191 **$ **8,518 
Earnings per common share
(2,920,000 shares)
$**0.02**$**1.15**$**1.00**$**0.75**$**2.92
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
Table XIX - 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 one domestic offices. Maturities of time deposits of $100,000 or more and of all time deposits at December 31 are indicated in Table XX and Table XXI, respectively.

**2002
2001
2000
Under 3 months**$**24,309 
$ 
29,858 
$ 
12,959 
3 to 12 months**39,398 
54,974 
35,386 
Over 12 months**28,076 
13,440 
7,631 
 **$**91,783 
$ 
98,272 
$ 
55,976 

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

Dollars in Thousands

 
** 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 - DEPOSITS**(Continued)**

Interest bearing transaction accounts
$
372,759 
2003
221,050 
2004
32,761 
2005
9,561 
2006
4,346 
2007
33,109 
Thereafter
23 
 
$
673,609 

Table XXI - Maturities of Interest Bearing Deposits at December 31, 2002

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, 2002 and 2001**2002
2001
Cash**$**56 
$ 
30 
Investment in bank subsidiary - at equity**98,354 
88,594 
Investment in credit life insurance company - at cost**50 
50 
Investment in other securities**22 
22 
Dividends receivable from bank subsidiary**1,577 
1,518 
Cash surrender value - life insurance**1,701 
1,532 
Total assets**$**101,760 
$ 
91,746 
Liabilities
Payable to directors**$**501 
$ 
440 
Dividends payable**1,577 
1,518 
Total liabilities**2,078 
1,958 
Stockholders' equity
Common stock - $10 par value, authorized 8,000,000
shares; 2,920,000 shares issued and outstanding **29,200 
29,200 
Additional paid-in capital**4,320 
4,320 
Retained earnings**59,389 
53,995 
Accumulated other comprehensive income**6,773 
2,273 
Total stockholders' equity**99,682 
89,788 
Total liabilities and stockholders' equity**$**101,760 
$ 
91,746 

Table XXII - 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, 2002 and 2001**2002
2001
Operating income
Dividends from bank subsidiary **$ **3,224 
$ 
2,874 
Other dividend income **46 
92 
Interest income **1 
1 
Other **96 
74 
Operating expenses **(109)
(104)
Income before equity in undistributed net 
income of bank subsidiary **3,258 
2,937 
Equity in undistributed net income of bank subsidiary **5,260 
7,676 
Net Income **$ **8,518 
$ 
10,613 

Table XXIII - Condensed Statements of Income of Parent

Dollars in Thousands

 

 

Condensed Statements of Cash Flows
Years Ended December 31, 2002 and 2001**2002
2001
Operating activities
Net income for the year**$**8,518 
$ 
10,613 
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary**(5,260)
(7,676)
Increase in other assets**(143)
(419)
Increase in payables**62 
58 
Total adjustments**(5,341)
(8,037)
Net cash provided by operating activities**3,177 
2,576 
Investing activities
Purchase of single premium life insurance policy**(85)
(160)
Net cash used by investing activities**(85)
(160)
Financing activities
Cash dividends paid**(3,066)
(2,394)
Increase (decrease) in cash**26 
22 
Cash at beginning of year**30 
8 
Cash at end of year**$**56 
$ 
30 

Table XXIV - 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, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $1,136,000, $1,039,000, and $875,000, in 2002, 2001, and 2000, 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 (2002 - $769,000; 2001 - $739,000) purchased in 1993 to fund the plan and the related liability (2002 - $456,000; 2001 - $498,000) were included in other assets and other liabilities, respectively. Net noncash income recognized on these policies of $30,000 in 2002 and $25,000 in 2001 is included in the above asset values. Net noncash income was $26,000 in 2000. 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 $23,000 in 2002, $50,000 in 2001, and $50,000 in 2000.

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 $258,000 for 2002, $219,000 for 2001, and $202,000 for 2000 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 $235,000 in 2002 and $425,000 in 2001, were purchased for new participants. Net noncash income recognized on these policies of $274,000 in 2002 and $208,000 in 2001 is included in the cash surrender values of $5,463,000 and $4,954,000 reported in other assets at December 31, 2002 and 2001, respectively. Net noncash income was $192,000 in 2000.

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 (2002 - $1,019,000; 2001 - $925,000) is included in other assets, and net noncash income recognized on this policy of $95,000 in 2002 and $38,000 in 2001 are included in the above asset values. Net noncash income was $38,000 in 2000.

In 2002, the Bank implemented a Director Split Dollar Life Insurance Plan and an Executive Split Dollar Life Insurance Plan. The Bank purchased a single premium whole life insurance policy on the life of each participant and endorsed a portion of the policy death benefits to the insured's estate, a trust, or another individual. The total life insurance purchased was $3,735,000. Net noncash income was recognized on these policies of $61,000 in 2002 and is included in the asset value of $3,795,000 which is a part of other assets.

The Bank is beneficiary on the insurance policies that fund the salary continuation plan, the deferred compensation plan, the group term replacement/split dollar plan, and the split dollar life insurance plan. These policies have an aggregate current death benefit of $15 million.
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
 
**SHAREHOLDER INFORMATION**

High
Low
Dividend**2002**First Quarter**$**70.00**$**68.00**$**-**Second Quarter**70.00**70.00**0.53**Third Quarter**72.00**70.00**-**Fourth Quarter**75.00**72.00**0.54
2001
First Quarter
$
60.00
$
58.00
$
-
Second Quarter
62.00
60.00
0.43
Third Quarter
66.00
62.00
-
Fourth Quarter
68.00
66.00
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
The 2,920,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 2002 had a market value of $219 million and were held by 2,310 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.

 

 

 

 

COMMON DIVIDEND PAYOUT RATIO**2002
2001
2000
1999
1998
Earnings per share**$**2.92 
$ 
3.63 
$ 
2.85 
$ 
2.59 
$ 
2.62 
Cash dividends per share**$**1.07 
$ 
0.95 
$ 
0.76 
$ 
0.70 
$ 
1.63 
Ratio**37%
26%
27%
27%
62%

 

Two color graphs are displayed below the "Common Dividend Payout Ratio" table illustrating net income and the earnings per share with cash dividends for the last five years.

 
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS**
 

COMPARATIVE DATA
(Dollars In Thousands)**2002
2001
2000
1999
1998
Average assets
$**890,525 
$ 
778,855 
$ 
640,796 
$ 
600,857 
$ 
552,654 
Average loans(net)
$**513,553 
$ 
462,725 
$ 
349,727 
$ 
318,868 
$ 
321,239 
Average deposits
$**785,702 
$ 
680,352 
$ 
556,385 
$ 
524,265 
$ 
483,369 
Return on
average assets**0.96%
1.36%
1.30%
1.25%
1.33%
Return on
beginning equity**9.50%
13.29%
11.55%
11.98%
12.21%
Tier 1 capital
to average assets**8.79%
9.08%
12.09%
11.43%
11.19%

 

Three color graphs are presented below the "Comparative Data" table. The average assets, average net loans and average deposits for the last five years are represented in the table of above.

 

NET INTEREST MARGIN
(Dollars In Thousands)**2002
2001
2000
1999
1998
Interest income
(tax equivalent)
$**53,571 
$ 
54,618 
$ 
46,502 
$ 
42,297 
$ 
41,046 
Interest expense**17,806 
23,885 
21,603 
17,950 
17,444 
 
$**35,765 
$ 
30,733 
$ 
24,899 
$ 
24,347 
$ 
23,602 
Net interest margin*
 **4.42%
 
4.30%
 
4.19%
 
4.40%
 
4.64%
*Net interest margin is net interest income (tax equivalent) divided by average earning assets.

A color graph below the "Net Interest Margin" table illustrates the net interest income for the last five years.********************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************************