Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

**x****           QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended June 30,2010**

 

**or**

 

**o****              TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from             to**

** **

**Commission File Numbers:000-10972**

 

**First Farmers and MerchantsCorporation**

(Exact name of registrant asspecified 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 telephonenumber, including area code)

 

 

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   x Yes  o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  o Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated  filer o                                        |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act). o Yes  x No

 

As of August 5, 2010, theregistrant had 5,487,713 shares of common stock outstanding.

 

 

 

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**PART I - FINANCIALINFORMATIO**N

 

**Item 1. Financial Statements.**

 
| The following unaudited consolidated financial statements of the  Registrant and its subsidiaries are included in this Report: |
|--------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                           |
| Consolidated  balance sheets – June 30, 2010 and December 31, 2009.                                             |
|                                                                                                                           |
| Consolidated statements of income - For the three  months and six months ended June 30, 2010 and June 30, 2009.      |
|                                                                                                                           |
| Consolidated statements of cash flows - For the six  months ended June 30, 2010 and June 30, 2009.                   |
|                                                                                                                           |
| Selected notes to consolidated financial statements.                                                                           |

 

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**FIRST FARMERS AND MERCHANTS CORPORATION ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2010**          | ** **  | **2009**              | ** ** |
| **(Dollars  in Thousands, Except Per Share Data)**                                                                                                                                             | ** ** | **(Unaudited)**   | ** **  | **(1)**               | ** ** |
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **        |        |                  |       |
| Cash and due from banks                                                                                                                                                                        | ** ** | **$**             | **15,364**  |                  | $          | 11,181 |   |
| Interest-bearing due from banks                                                                                                                                                                | ** ** | **3,959**         |        | 5,557                 |       |
| Federal funds sold                                                                                                                                                                             | ** ** | **27,500**        |        | 16,725                |       |
| Total cash and cash equivalents                                                                                                                                                                | ** ** | **46,823**        |        | 33,463                |       |
| Securities                                                                                                                                                                                     | ** ** | ** **        |        |                  |       |
| Available-for-sale (amortized cost $209,730 and  $207,027, respectively)                                                                                                                       | ** ** | **212,392**       |        | 208,238               |       |
| Held-to-maturity (fair market value $41,685 and  $48,722, respectively)                                                                                                                        | ** ** | **40,678**        |        | 47,613                |       |
| Total securities                                                                                                                                                                               | ** ** | **253,070**       |        | 255,851               |       |
| Loans, net of deferred fees                                                                                                                                                                    | ** ** | **573,293**       |        | 576,655               |       |
| Allowance for loan and lease losses                                                                                                                                                            | ** ** | **(9,337**        | **)**       | (8,929                | )          |
| Net loans                                                                                                                                                                                      | ** ** | **563,956**       |        | 567,726               |       |
| Bank premises and equipment, at cost less  allowance for depreciation                                                                                                                          | ** ** | **21,900**        |        | 20,625                |       |
| Core deposit and other intangibles                                                                                                                                                             | ** ** | **9,074**         |        | 9,111                 |       |
| Other assets                                                                                                                                                                                   | ** ** | **49,224**        |        | 48,252                |       |
| TOTAL ASSETS                                                                                                                                                                                   | ** ** | **$**             | **944,047** |                  | $          | 935,028 |   |
|                                                                                                                                                                                           |       |              |        |                  |       |
| **LIABILITIES**                                                                                                                                                                                | ** ** | ** **        |        |                  |       |
| Deposits                                                                                                                                                                                       | ** ** | ** **        |        |                  |       |
| Noninterest-bearing                                                                                                                                                                            | ** ** | **$**             | **122,543** |                  | $          | 116,157 |   |
| Interest-bearing (including certificates of  deposits over $100: 2010 - $104,704; 2009 - $97,572)                                                                                              | ** ** | **664,841**       |        | 656,168               |       |
| Total deposits                                                                                                                                                                                 | ** ** | **787,384**       |        | 772,325               |       |
| Federal funds purchased and securities sold under  agreements to repurchase                                                                                                                    | ** ** | **4,996**         |        | 5,856                 |       |
| Dividends payable                                                                                                                                                                              | ** ** | **2,030**         |        | 2,038                 |       |
| Short-term borrowings                                                                                                                                                                          | ** ** | **420**           |        | 414                   |       |
| Accounts payable and accrued liabilities                                                                                                                                                       | ** ** | **13,706**        |        | 13,045                |       |
| Federal Home Loan Bank Advances                                                                                                                                                                | ** ** | **27,177**        |        | 34,177                |       |
| TOTAL LIABILITIES                                                                                                                                                                              | ** ** | **835,713**       |        | 827,855               |       |
|                                                                                                                                                                                           |       |              |        |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                  | ** ** | ** **        |        |                  |       |
| Common stock - $10 par value per share, 8,000,000  shares authorized; 5,487,713 and 5,506,993 shares issued and outstanding as  of June 30, 2010 and December 31, 2009, respectively | ** ** | **54,877**        |        | 55,070                |       |
| Retained earnings                                                                                                                                                                              | ** ** | **51,725**        |        | 51,264                |       |
| Accumulated other comprehensive income                                                                                                                                                         | ** ** | **1,637**         |        | 744                   |       |
| TOTAL SHAREHOLDERS’ EQUITY  BEFORE NONCONTROLLING INTEREST - PREFERRED STOCK OF SUBSIDIARY                                                                                                | ** ** | **108,239**       |        | 107,078               |       |
| Noncontrolling interest - preferred stock of  subsidiary                                                                                                                                       | ** ** | **95**            |        | 95                    |       |
|                                                                                                                                                                                           | ** ** | **108,334**       | ** **  | **107,173**           | ** ** |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                | ** ** | **$**             | **944,047** |                  | $          | 935,028 |   |

 

----

(1) Derived from audited financial statements.

 

The accompanying notes are an integral part of consolidated financialstatements.

 

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**FIRST FARMERS AND MERCHANTS CORPORATION ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(Dollars in Thousands Except Per Share Data)**                                        | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(Unaudited)**                                                                         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                                                        | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Interest and fees on loans                                                              | ** ** | **$**                  | **8,058**  |                 | $          | 7,910 | ** ** | **$** | **15,932** |   | $ | 15,777 |   |
| Income on investment securities                                                         | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Taxable interest                                                                        | ** ** | **1,173**              |       | 1,119                | ** ** | **2,357** |   | 2,445 |   |
| Exempt from federal income tax                                                          | ** ** | **878**                |       | 946                  | ** ** | **1,774** |   | 1,920 |   |
| Dividends                                                                               | ** ** | **55**                 |       | 46                   | ** ** | **102** |   | 106 |   |
|                                                                                    | ** ** | **2,106**              |       | 2,111                | ** ** | **4,233** |   | 4,471 |   |
| Other interest income                                                                   | ** ** | **10**                 |       | 27                   | ** ** | **28** |   | 44 |   |
| TOTAL INTEREST INCOME                                                                   | ** ** | **10,174**             |       | 10,048               | ** ** | **20,193** |   | 20,292 |   |
|                                                                                    |       |                   |       |                 |       |   |   |   |   |
| **INTEREST EXPENSE**                                                                    | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Interest on deposits                                                                    | ** ** | **1,535**              |       | 2,083                | ** ** | **3,188** |   | 4,327 |   |
| Interest on other borrowings                                                            | ** ** | **250**                |       | 291                  | ** ** | **524** |   | 603 |   |
| TOTAL INTEREST EXPENSE                                                                  | ** ** | **1,785**              |       | 2,374                | ** ** | **3,712** |   | 4,930 |   |
| NET INTEREST INCOME                                                                     | ** ** | **8,389**              |       | 7,674                | ** ** | **16,481** |   | 15,362 |   |
| PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES                                            | ** ** | **405**                |       | 770                  | ** ** | **1,491** |   | 1,425 |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN AND  LEASE LOSSES                          | ** ** | **7,984**              |       | 6,904                | ** ** | **14,990** |   | 13,937 |   |
|                                                                                    | ** ** | **—**             |       |                 | ** ** | **—** |   | — |   |
| **NONINTEREST INCOME**                                                                  | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Trust department income                                                                 | ** ** | **465**                |       | 436                  | ** ** | **1,025** |   | 994 |   |
| Service fees on deposit accounts                                                        | ** ** | **1,797**              |       | 1,833                | ** ** | **3,406** |   | 3,555 |   |
| Other fees and commissions                                                              | ** ** | **142**                |       | 156                  | ** ** | **257** |   | 240 |   |
| Other operating (loss) income                                                           | ** ** | **(112**               | **)**      | 267                  | ** ** | **(61** | **)** | 367 |   |
| Securities (loss) gains                                                                 | ** ** | **(1**                 | **)**      | 528                  | ** ** | **502** |   | 2,482 |   |
| TOTAL NONINTEREST INCOME                                                                | ** ** | **2,291**              |       | 3,220                | ** ** | **5,129** |   | 7,638 |   |
|                                                                                    | ** ** | **—**             |       |                 | ** ** | **—** |   | — |   |
| **NONINTEREST EXPENSE**                                                                 | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Salaries and employee benefits                                                          | ** ** | **4,064**              |       | 4,143                | ** ** | **8,180** |   | 8,313 |   |
| Net occupancy expense                                                                   | ** ** | **673**                |       | 628                  | ** ** | **1,314** |   | 1,269 |   |
| Furniture and equipment expense                                                         | ** ** | **274**                |       | 220                  | ** ** | **532** |   | 548 |   |
| Other operating expenses                                                                | ** ** | **3,128**              |       | 3,179                | ** ** | **6,833** |   | 6,086 |   |
| TOTAL NONINTEREST EXPENSES                                                              | ** ** | **8,139**              |       | 8,170                | ** ** | **16,859** |   | 16,216 |   |
| INCOME BEFORE PROVISION  FOR INCOME TAXES                                               | ** ** | **2,136**              |       | 1,954                | ** ** | **3,260** |   | 5,359 |   |
| PROVISION FOR INCOME TAXES                                                              | ** ** | **196**                |       | 229                  | ** ** | **128** |   | 926 |   |
| Net income before noncontrolling interest -  dividends on preferred stock of subsidiary | ** ** | **$**                  | **1,940**  |                 | $          | 1,725 | ** ** | **$** | **3,132** |   | $ | 4,433 |   |
| Noncontrolling interest - dividends on preferred  stock of subsidiary                   | ** ** | **$**                  | **—** |                 | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS                                            | ** ** | **$**                  | **1,940**  |                 | $          | 1,725 | ** ** | **$** | **3,132** |   | $ | 4,433 |   |
|                                                                                    |       |                   |       |                 |       |   |   |   |   |
| **BASIC EARNINGS PER SHARE**                                                            | ** ** | ** **             |       |                 | ** ** | ** ** |   |   |   |
| Weighted Average Shares Outstanding                                                     | ** ** | **5,487,729**          |       | 5,547,088            | ** ** | **5,495,835** |   | 5,560,856 |   |
|                                                                                    | ** ** | **$**                  | **0.35**   |                 | $          | 0.31 | ** ** | **$** | **0.57** |   | $ | 0.80 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Dollars in Thousands)**                                                                | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **OPERATING ACTIVITIES**                                                                  | ** ** | ** **                         |       |   |   |
| Net income available for common shareholders                                              | ** ** | **$**                              | **3,132**  |   | $ | 4,433 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities         | ** ** | ** **                         |       |   |   |
| Excess (deficiency) of provision for possible loan  and lease losses over net charge-offs | ** ** | **1,491**                          |       | (415 | ) |
| Provision for depreciation and amortization of  premises and equipment                    | ** ** | **605**                            |       | 571 |   |
| Securities gains                                                                          | ** ** | **(502**                           | **)**      | (2,482 | ) |
| Loss from disposition of fixed assets                                                     | ** ** | **—**                         |       | 129 |   |
| Loss (gain) from disposition of other real estate                                         | ** ** | **268**                            |       | (6 | ) |
| Amortization of deposit base intangibles                                                  | ** ** | **37**                             |       | 37 |   |
| Amortization of investment security premiums, net  of accretion of discounts              | ** ** | **870**                            |       | 511 |   |
| Increase in cash surrender value of life insurance  contracts                             | ** ** | **(434**                           | **)**      | (15 | ) |
| (Increase) decrease in                                                                    | ** ** | ** **                         |       |   |   |
| Deferred income taxes                                                                     | ** ** | **(467**                           | **)**      | 457 |   |
| Interest receivable                                                                       | ** ** | **360**                            |       | (108 | ) |
| Other real estate owned                                                                   | ** ** | **(2,802**                         | **)**      | (3,623 | ) |
| Other assets                                                                              | ** ** | **413**                            |       | — |   |
| (Decrease) increase in                                                                    | ** ** | ** **                         |       |   |   |
| Interest payable                                                                          | ** ** | **(65**                            | **)**      | (397 | ) |
| Other liabilities                                                                         | ** ** | **726**                            |       | 1,207 |   |
| Total adjustments                                                                         | ** ** | **500**                            |       | (4,134 | ) |
| Net cash provided by operating activities                                                 | ** ** | **3,632**                          |       | 299 |   |
| **INVESTING ACTIVITIES**                                                                  | ** ** | ** **                         |       |   |   |
| Proceeds from maturities, calls, and sales of  available-for-sale securities              | ** ** | **95,732**                         |       | 148,217 |   |
| Proceeds from maturities and calls of  held-to-maturity securities                        | ** ** | **6,905**                          |       | 7,834 |   |
| Purchases of investment securities                                                        | ** ** | ** **                         |       |   |   |
| Available-for-sale                                                                        | ** ** | **(98,772**                        | **)**      | (164,554 | ) |
| Held-to-maturity                                                                          | ** ** | **—**                         |       | — |   |
| Net increase (decrease) in loans                                                          | ** ** | **2,280**                          |       | (3,008 | ) |
| Proceeds from sale of foreclosed assets                                                   | ** ** | **1,597**                          |       | 41 |   |
| Purchase of life insurance premium                                                        | ** ** | **(468**                           | **)**      | (235 | ) |
| Purchases of premises and equipment                                                       | ** ** | **(1,880**                         | **)**      | (3,628 | ) |
| Net cash provided by (used in) investing  activities                                      | ** ** | **5,394**                          |       | (15,333 | ) |
| **FINANCING ACTIVITIES**                                                                  | ** ** | ** **                         |       |   |   |
| Net increase in noninterest-bearing and  interest-bearing deposits                        | ** ** | **15,059**                         |       | 41,520 |   |
| Net (increase) decrease in short term borrowings                                          | ** ** | **(854**                           | **)**      | 90 |   |
| Payments to FHLB borrowings                                                               | ** ** | **(7,000**                         | **)**      | (7,000 | ) |
| Repurchase of common stock                                                                | ** ** | **(833**                           | **)**      | (2,500 | ) |
| Cash dividends paid on common stock                                                       | ** ** | **(2,038**                         | **)**      | (2,000 | ) |
| Net cash provided by financing activities                                                 | ** ** | **4,334**                          |       | 30,110 |   |
| Increase in cash and cash equivalents                                                     | ** ** | **13,360**                         |       | 15,076 |   |
| Cash and cash equivalents at beginning of period                                          | ** ** | **33,463**                         |       | 31,536 |   |
| Cash and cash equivalents at end of period                                                | ** ** | **$**                              | **46,823** |   | $ | 46,612 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The interim unaudited consolidated financial statements of First Farmersand Merchants Corporation (the “Corporation”) presented in this report havebeen prepared on a consistent basis and in accordance with the instructions to Form 10-Qand do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements.  Management has evaluated all significantevents and transactions that occurred through August 5, 2010, forpotential recognition or disclosure in these consolidated financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included.  These adjustments were ofa normal, recurring nature and consistent with generally accepted accountingprinciples.  For further information,refer to the consolidated financial statements and notes included in theCorporation’s Annual Report on Form 10-K for the year ended December 31,2009.

 

**NOTE 2 — STOCK REPURCHASE**

 

During the second quarter of 2010, the Corporation repurchased, fromthird-party sellers, 1,500 shares of the Corporation’s common stock at apreviously negotiated price of $43.20 per share for an aggregate purchase priceof $64,800.

 

**NOTE 3 — FAIR VALUE MEASUREMENT**

 

The fair value of an assetor liability is the price that would be received to sell that asset or paid totransfer that liability in an orderly transaction occurring in the principalmarket (or most advantageous market in the absence of a principal market) forsuch asset or liability. In estimating fair value, the Corporation utilizesvaluation techniques that are consistent with the market approach, the incomeapproach and/or the cost approach. Such valuation techniques are consistentlyapplied. Inputs to valuation techniques include the assumptions that marketparticipants would use in pricing an asset or liability. Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “FairValue Measurements and Disclosures,” establishes a fair value hierarchy forvaluation inputs that gives the highest priority to quoted prices in activemarkets for identical assets or liabilities and the lowest priority tounobservable inputs. The fair value hierarchy is as follows:

 

·                  *Level 1Inputs*- Unadjusted quoted prices in active markets for identical assets orliabilities that the reporting entity has the ability to access at themeasurement date.

 

·                  *Level2 Inputs* - Inputs otherthan quoted prices included in Level 1 that are observable for the asset orliability, either directly or indirectly. These might include quoted prices forsimilar assets or liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active, inputs other thanquoted prices that are observable for the asset or liability (such as interestrates, volatilities, prepayment speeds, credit risks, etc.) or inputs thatare derived principally from or corroborated by market data by correlation orother means.

 

·                  *Level3 Inputs* - Unobservableinputs for determining the fair values of assets or liabilities that reflect anentity’s own assumptions about the assumptions that market participants woulduse in pricing the assets or liabilities.

 

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Assets measured at fair value on a recurring basis comprised thefollowing at June 30, 2010:

 
| ** **                               | ** ** | **Fair Value Measurements at Reporting Date Using** | ** **  |
|------------------------------------------|------------|-----------------------------------------------------|-------------|
| **(Dollars in thousands)**               | ** ** | **Fair Value  6/30/2010**                           | ** **  | **Quoted Prices in   Active Markets for   Identical Assets   (Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs (Level 3)** | ** ** |
|                                     |       |                                                |        |   |   |   |   |   |   |
| Obligations of:                          |       |                                                |        |   |   |   |   |   |   |
| U.S. Government agencies                 |       | $                                                   | 114,889     |   | $ | — |   | $ | 114,889 |   | $ | — |   |
| States and political subdivisions        |       | 50,008                                              |        | — |   | 50,008 |   | — |   |
| Residential mortgage-backed securities   |       | 27,549                                              |        | — |   | 27,549 |   | — |   |
| Other domestic debt securities           |       | 16,049                                              |        | — |   | 16,049 |   | — |   |
| Equity securities                        |       | 3,897                                               |        | — |   | 3,897 |   | — |   |
| **Total available-for-sale  securities** | ** ** | **$**                                               | **212,392** | ** ** | **$** | **—** | ** ** | **$** | **212,392** | ** ** | **$** | **—** | ** ** |

 

The fair values used by the Corporation are obtained from anindependent pricing service and represent either quoted market prices for theidentical securities (Level 1 inputs) or fair values determined by pricingmodels using a market approach that consider observable market data, such asinterest rate volatilities, LIBOR yield curve, credit spreads and prices frommarket makers and live trading systems (Level 2).

 

Certain financial assets and liabilities are measured at fair value ona nonrecurring basis. These instruments are not measured at fair value on anongoing basis but are subject to fair value adjustments in certaincircumstances (for example, when there is evidence of impairment). The onlyfinancial asset or liability measured at fair value on a non-recurring basisfor the second quarter of 2010 was impaired loans.

 

*Impaired loans —*Certain impaired loans arereported at the fair value of the underlying collateral if repayment isexpected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observablemarket data or Level 3 inputs based on customized discounting criteria.  During the second quarter of 2010, certain impairedloans were reevaluated and reported at fair value through a specific valuationallowance allocation to the allowance for possible loan and lease losses basedon the fair value of the underlying collateral. Impaired loans with a carrying value of $20.7 million were reduced byspecific valuation allowance allocations totaling $1.9 million to a totalreported fair value of $18.8 million based on collateral valuations utilizingLevel 3 valuation inputs.

 

*Non-Financial Assets and Non-Financial Liabilities*— TheCorporation has no non-financial assets or non-financial liabilities measuredat fair value on a recurring basis. Certain  non-financial assets andnon-financial liabilities measured at fair value on a non-recurring basisinclude foreclosed assets (upon initial recognition or subsequent impairment),non-financial assets and non-financial liabilities measured at fair value inthe second step of goodwill impairment test, and intangible assets and othernon-financial long-lived assets measured at fair value for impairmentassessment.

 

During the second quarter of 2010, certain foreclosed assets, uponinitial recognition, were remeasured and reported at fair value through acharge-off to the allowance for possible loan and lease losses based upon the fairvalue of the foreclosed asset.  The fairvalue of a foreclosed asset, upon initial recognition, is estimated using Level2 inputs based on observable market data or Level 3 inputs based on customizeddiscounting criteria.  Foreclosed assetsmeasured at fair value totaled $10.9 million (utilizing Level 2 valuationinputs) at June 30, 2010.

 

The table below presents thefair value of financial assets and financial liabilities, including thosefinancial assets and financial liabilities that are not measured and reportedat fair value on a recurring basis or non-recurring basis. A detaileddescription of the valuation methodologies used in estimating the fair value offinancial instruments is set forth in Note 12 to the consolidated financialstatements incorporated by reference into the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

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The estimated fair values of financial instruments were as follows(dollars in thousands):

 
| ** **                                                                  | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**           | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                  | ** ** | **Amount**             | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial assets                                                            |       |                   |       |                       |       |   |   |   |   |
| Cash and due from banks                                                     | ** ** | **$**                  | **15,364** | ** **                 | **$**      | **15,364** |   | $ | 11,181 |   | $ | 11,181 |   |
| Interest-bearing deposits in banks                                          | ** ** | **3,959**              | ** ** | **3,959**                  |       | 5,557 |   | 5,557 |   |
| Federal funds sold                                                          | ** ** | **27,500**             | ** ** | **27,500**                 |       | 16,725 |   | 16,725 |   |
| Securities available-for-sale                                               | ** ** | **212,392**            | ** ** | **212,392**                |       | 208,238 |   | 208,238 |   |
| Securities held-to-maturity                                                 | ** ** | **40,678**             | ** ** | **41,685**                 |       | 47,613 |   | 48,722 |   |
| Loans, net                                                                  | ** ** | **563,956**            | ** ** | **573,879**                |       | 567,726 |   | 570,975 |   |
| Accrued interest receivable                                                 | ** ** | **4,089**              | ** ** | **4,089**                  |       | 4,449 |   | 4,449 |   |
| Financial liabilities                                                       |       |                   |       |                       |       |   |   |   |   |
| Deposits                                                                    | ** ** | **787,384**            | ** ** | **789,130**                |       | 772,325 |   | 773,710 |   |
| Federal funds purchased and securities sold under  agreements to repurchase |       | **4,996**              |       | **4,996**                  |       | 5,856 |   | 5,856 |   |
| Other short term liabilities                                                | ** ** | **420**                | ** ** | **420**                    |       | 414 |   | 414 |   |
| FHLB borrowings                                                             | ** ** | **27,177**             | ** ** | **28,202**                 |       | 34,177 |   | 38,616 |   |
| Accrued interest payable                                                    | ** ** | **1,119**              | ** ** | **1,119**                  |       | 1,184 |   | 1,184 |   |
| Off-balance sheet credit related instruments:                               |       |                   |       |                       |       |   |   |   |   |
| Commitments to extend credit                                                | ** ** | ** **             |       | **103**                    |       |   |   | 103 |   |
|                                                                             |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

A description of the valuation methodologies used for instrumentsmeasured at fair value as well as the general classification of suchinstruments pursuant to the valuation hierarchy is set forth below.  These valuation methodologies were applied toall of the financial assets and financial liabilities of the Corporation andits sole wholly-owned subsidiary, First Farmers and Merchants Bank (the “Bank”),carried at fair value effective June 30, 2010.  If quoted market prices are not available,fair value is based on internally developed models that primarily use, asinputs, observable market-based parameters. Valuation adjustments may be madeto ensure that financial instruments are recorded at fair value. Theseadjustments may include amounts to reflect counterparty credit quality and theCorporation’s creditworthiness among other things, as well as unobservableparameters.  Any such valuationadjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair valuecalculation that may not be indicative of net realizable value or reflective offuture fair values.  While managementbelieves the valuation methodologies are appropriate and consistent with othermarket participants, the use of different methodologies or assumptions todetermine the fair value of certain financial instruments could result in adifferent estimate of fair value at the reporting date.  Furthermore, the reported fair value amounts havenot been comprehensively revalued since the presentation dates and, therefore,estimates of fair value after the balance sheet date may differ significantlyfrom the amounts presented herein.

 

Financial assets and financial liabilities measured at fair value on arecurring basis include the following:

 

**Loans: **The fair value of portfolioloans assumes sale of the notes to a third party financial investor.  Accordingly, this value is not necessarilythe value to the Corporation if the notes were held to maturity.  The Corporation considered interest rate,credit and market factors in estimating the fair value of loans.  In the current whole loan market, financialinvestors are generally requiring a much higher rate of return than the returninherent in loans if held to maturity given the lack of market liquidity.  This divergence accounts for the majority ofthe difference in carrying amount over fair value.

 

**Deposits:**  The fair value of fixed maturity certificatesof deposit is estimated using a discounted cash flow calculation based oncurrent rates offered for deposits of similar remaining maturities.

 

**FHLB Borrowings: **The fair value of FederalHome Loan Bank of Cincinnati (the “FHLB”) borrowings is estimated usingdiscounted cash flow analysis based on rates currently available to theCorporation for borrowings with similar terms.

 

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**NOTE 4 — FEDERAL HOME LOAN BANKCREDIT LINE**

 

TheBank has a Blanket Agreement for Advances and Security Agreement (the “BlanketAgreement”) with the FHLB dated March 31, 2008.  Advances made to the Bank under the BlanketAgreement are collateralized by FHLB stock and unidentified qualifyingresidential mortgage loans totaling 150% of the outstanding amountborrowed.  The Bank made an annualprincipal payment of $7.0 million to the FHLB under the Blanket Agreement oneach of March 31, 2009 and March 31, 2010.

 

Scheduledprincipal maturities of borrowings under this credit line as of June 30,2010, are as follows (dollars in thousands):

 
| 2010  |   | $      |  3,077 |   |
|-------|--------|--------|-------------|--------|
| 2011  |   | 7,000  |        |
| 2012  |   | 7,000  |        |
| 2013  |   | 10,100 |        |
| Total |   | $      | 27,177      |   |

 

Stockheld in the FHLB totaling $3.0 million at June 30, 2010 is carried atcost.  The stock is restricted and canonly be sold to the FHLB at par.

 

TheBank also has a Cash Management Advance Line of Credit Agreement (the “CMA”)dated March 31, 2009, with the FHLB. The CMA is a component of the Blanket Agreement.  The purpose of the CMA is to assist withshort-term liquidity management.  Underthe terms of the CMA, the Bank may borrow a maximum of $40.0 million, selectinga variable rate of interest for up to 90 days or a fixed rate for a maximum of30 days.  There were no borrowingsoutstanding under the CMA as of June 30, 2010.

 

**NOTE 5 —SECURITIES**

 

Securities with an amortized cost of $169.9 million and a fair value of$171.9 million at June 30, 2010 were pledged to secure deposits and forother purposes as required or permitted by law. The fair value is established by an independent pricing service as ofthe approximate dates indicated.  Thedifferences between the amortized cost and fair value reflect current interestrates and represent the potential gain if the portfolio had been liquidated onthat date.  Security gains are realizedonly in the event of dispositions prior to maturity.

 

Asummary of the amortized cost and estimated fair value of securities at June 30,2010 is as follows (dollars in thousands):

 
| ** **                        | ** ** | **Amortized** | ** **  | **Gross Unrealized** | ** ** | **Fair**   | ** ** |
|-----------------------------------|------------|---------------|-------------|----------------------|------------|------------|------------|
| ** **                        | ** ** | **Cost**      | ** **  | **Gains**            | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **June 30, 2010**            |       |          |        |                 |       |       |       |   |   |
| Available-for-sale securities     |       |          |        |                 |       |       |       |   |   |
| U.S. Government agencies          | ** ** | **$**         | **113,889** | ** **           | **$**      | **1,000**  | ** ** | **$** | **—** | ** ** | **$** | **114,889** | ** ** |
| Mortgage backed securities        | ** ** | **27,138**    | ** **  | **411**              | ** ** | **—** | ** ** | **27,549** | ** ** |
| States and political subdivisions | ** ** | **49,306**    | ** **  | **892**              | ** ** | **190**    | ** ** | **50,008** | ** ** |
| Other securities                  | ** ** | **19,397**    | ** **  | **565**              | ** ** | **16**     | ** ** | **19,946** | ** ** |
|                              | ** ** | **$**         | **209,730** | ** **           | **$**      | **2,868**  | ** ** | **$** | **206** | ** ** | **$** | **212,392** | ** ** |
| ** **                        | ** ** | ** **    | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Held-to-maturity securities       | ** ** | ** **    | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| States and political subdivisions | ** ** | **$**         | **40,678**  | ** **           | **$**      | **1,060**  | ** ** | **$** | **53** | ** ** | **$** | **41,685** | ** ** |
|                              | ** ** | **$**         | **40,678**  | ** **           | **$**      | **1,060**  | ** ** | **$** | **53** | ** ** | **$** | **41,685** | ** ** |

 

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At June 30, 2010, theBank did not hold investment securities of any single issuer, other thanobligations of the U.S. government agencies, whose aggregate book valueexceeded 10% of shareholders’ equity.

 

Proceeds from the maturity,call or sale of available-for-sale securities were $95.7 million during the sixmonths ended June 30, 2010. Proceeds from the maturity or call of held-to-maturity securities were$6.9 million during the six months ended June 30, 2009.

 

The fair values of all securities at June 30, 2010 either equaledor exceeded the cost of those securities, or the fair value is consideredtemporary.  The information in the tablebelow classifies the investments with unrealized losses at June 30, 2010according to the term of the unrealized loss. Management evaluates securities for other-than-temporary impairmentperiodically, or more frequently when circumstances require an evaluation.  An impairment judgment is based on (i) theamount of time and loss, (ii) the financial condition of the issuer and (iii) management’sintent and ability to hold the investment long enough for any anticipatedrecovery in value.

 

Management has the ability and intent to hold the securities classifiedas held-to-maturity until they mature. Furthermore, as of June 30, 2010, management also had the abilityto hold the securities classified as available for sale for a period of timesufficient for a recovery of cost.  Theunrealized losses are largely as a result of increases in market interest ratesover the yield available at the time the underlying securities werepurchased.  The fair value is expected torecover as the bonds approach their maturity date or repricing date or ifmarket yields for such investments decline. Management does not believe any of the securities are impaired becauseof reasons of credit quality. Accordingly, as of June 30, 2010, management believes theimpairments detailed in the table below are temporary and no impairment losshas been realized in the Corporation’s consolidated income statement.

 

Thefollowing table presents the Bank’s investments with unrealized losses at June 30,2010 according to the term of the unrealized loss:

 
| ** **                            | ** ** | **Less than 12 months** | ** ** | **12 months or greater** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------------------|------------|------------|------------|
| ** **                            | ** ** | **Fair**                | ** ** | **Unrealized**           | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(Dollars in thousands)**            | ** ** | **Value**               | ** ** | **Losses**               | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| **Type of Security**                  | ** ** | ** **              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **States and political subdivisions** | ** ** | **$**                   | **9,405**  | ** **               | **208**    | ** ** | **$**      | **415** | ** ** | **$** | **35** | ** ** | **$** | **9,820** | ** ** | **$** | **243** | ** ** |
| **Corporate bonds**                   | ** ** | **1,622**               | ** ** | **16**                   | ** ** | **—** | ** ** | **—** | ** ** | **1,622** | ** ** | **16** | ** ** |
| ** **                            | ** ** | **$**                   | **11,027** | ** **               | **$**      | **224**    | ** ** | **$** | **415** | ** ** | **$** | **35** | ** ** | **$** | **11,442** | ** ** | **$** | **259** | ** ** |
|                                       |            |                         |            |                          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30, 2010, one of 192 state and political subdivisionsecurities had recorded unrealized losses for a period longer than 12months.  Because these securities, alongwith the corporation securities, declined in value when interest rates began torise, and not because of the credit quality of the issuer, and becausemanagement had both the intent and ability to hold the investments, thesecurities were not considered other-than-temporarily impaired.

 

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The table below shows the amortized cost and fair value of investmentsecurities at June 30, 2010 by contractual or legal maturity.  Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations.  Mortgage-backed securitiesand equity securities are shown separately since they are not due at a singlematurity date.

 
| ** **                        | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Yield**       | ** ** |
|-----------------------------------|------------|---------------|------------|------------|------------|-----------------|------------|
| **(Dollars in Thousands)**        | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **(Unaudited)** | ** ** |
| **Available-for-sale securities** |       |          |       |       |       |            |       |
| U.S. Government agencies          |       |          | ** ** | ** ** |       |            |       |
| Within one year                   |       | $             | 10,902     | ** ** | **$**      | **10,907**      |       | 2.2 | % |
| After one but within five years   |       | 43,631        | ** ** | **43,938** |       | 1.7             | %          |
| After five but within ten years   |       | 59,356        | ** ** | **60,044** |       | 4.6             | %          |
| Mortgage backed securities        |       |          | ** ** | ** ** |       |            |       |
| Within one year                   |       | 6,738         | ** ** | **6,750**  |       | 1.5             | %          |
| After one but within five years   |       | 15,681        | ** ** | **15,933** |       | 2.9             | %          |
| After five but within ten years   |       | 4,719         | ** ** | **4,865**  |       | 3.8             | %          |
| States and political subdivisions |       |          | ** ** | ** ** |       |            |       |
| Within one year                   |       | 205           | ** ** | **205**    |       | 11.0            | %          |
| After one but within five years   |       | 6,426         | ** ** | **6,640**  |       | 3.8             | %          |
| After five but within ten years   |       | 5,070         | ** ** | **5,086**  |       | 5.4             | %          |
| After ten years                   |       | 37,605        | ** ** | **38,078** |       | 6.1             | %          |
| Other securities                  |       |          |       |       |       |            |       |
| Within one year                   |       | 1,645         | ** ** | **1,676**  |       | 4.4             | %          |
| After one but within five years   |       | 13,396        | ** ** | **13,884** |       | 3.4             | %          |
| After five but within ten years   |       | 459           | ** ** | **489**    |       | 4.5             | %          |
| After ten years                   |       | 3,897         | ** ** | **3,897**  |       | 0.7             | %          |
|                              |       | $             | 209,730    | ** ** | **$**      | **212,392**     |       |   |   |
| **Held-to-maturity securities**   |       |          |       |       |       |            |       |
| States and political subdivisions | ** ** | ** **    |       |       |       |            |       |
| Within one year                   | ** ** | **$**         | **480**    |       | $          | 481             |       | 6.8 | % |
| After one but within five years   | ** ** | **10,461**    |       | 10,802     |       | 7.0             | %          |
| After five but within ten years   | ** ** | **10,968**    |       | 11,296     |       | 6.4             | %          |
| After ten years                   | ** ** | **18,769**    |       | 19,106     |       | 6.2             | %          |
|                              | ** ** | **$**         | **40,678** |       | $          | 41,685          |       |   |   |

 

**NOTE 6 — RECENT ACCOUNTING PRONOUNCEMENTS**

 

In January 2010, theFASB issued Accounting Standards Update (“ASU”) No. 2010-06, *Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair ValueMeasurements.*  This ASUrequires fair value disclosures to be disaggregated below line items in thestatement of financial position.  Itclarifies that fair value disclosures should include a description of theinputs and valuation techniques used for both recurring and nonrecurring Level2 and Level 3 estimates.  It alsorequires entities to disclose any significant transfers between Levels 1, 2,and 3 during a reporting period and the reasons the transfers were made.  These disclosures have been included in thisquarterly report on Form 10-Q, as appropriate.

 

On January 1, 2010, ASUNo. 2009-16, *Transfers and Servicing (Topic 860):  Accounting for Transfers of Financial Assets*became effective.  This ASU removed theconcept of a qualifying special-purpose entity from generally acceptedaccounting principles and changed the requirements for derecognizing financialassets.  Upon adoption of the ASU, theBank had no change in its balance sheet or required capital because off-balancesheet financing is not used.

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

**FORWARD-LOOKINGSTATEMENTS**

 

Certain statements contained in this reportmay not be based on historical facts and are “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). These forward-looking statements may beidentified by, among other things, the use of forward-looking terminology suchas “could,” “would,” “expects,” “believes,” “may” or “will,” or future orconditional verb tenses, and variations or negatives of such terms.  Theseforward-looking statements include, without limitation, those relating to theCorporation’s valuation methodologies, fair value of bonds, impairment ofsecurities, repayment of loans, loan portfolio concentrations, fair value ofimpaired loans, satisfaction of capital adequacy requirements, payments onadvances from the Federal Home Loan Bank of Cincinnati (the “FHLB”), adequacyof traditional sources of cash generated from operating activities to meetliquidity needs and the realization of deferred income tax assets.  We caution you not to place undue reliance onsuch forward-looking statements in this report because results could differmaterially from those anticipated due to a variety of factors.  These factors include, but are not limitedto, conditions in the financial market, liquidity needs, the sufficiency of ourallowance for loan and lease losses (“ALLL”), economic conditions in thecommunities in the State of Tennessee where the Corporation does business, theimpact of government regulation and supervision, interest rate risk, includingchanges in monetary policy and fluctuating interest rates, the Corporation’sability to attract and retain key personnel, competition from other financialservices, the liquidity of the Corporation’s common stock, other factorsgenerally understood to affect the financial results of financial servicescompanies and other factors detailed from time to time in our filings with theSecurities and Exchange Commission (the “SEC”). We undertake no obligation toupdate these forward-looking statements to reflect events or circumstances thatoccur after the date of this report.

 

**EXECUTIVE OVERVIEW**

 

At June 30, 2010, the consolidated total assets of First Farmersand Merchants Corporation (the “Corporation”) were $944.0 million, itsconsolidated net loans were $564.0 million, its total deposits were $787.4million and its total shareholders’ equity was $108.3 million.  The Corporation’s loan portfolio at June 30,2010 reflected a decrease of $3.8 million, or 0.7%, compared to December 31,2009.  Total deposits increased $15.1million, or 2.0%, and shareholders’ equity increased by 1.1% during the firstsix months of 2010.  Total shareholders’equity includes an unrealized gain on available-for-sale securities of $1.6million.

 

**FINANCIAL CONDITION**

 

Average earning assets at June 30, 2010 were up 1.7%, or $14.2million, from average earning assets at December 31, 2009.  Average overnight investments at June 30,2010 were up 2.2% compared to December 31, 2009.  Average investment securities at June 30,2010 were up 11.1% compared to December 31, 2009.  Average total assets of $951.1 million at June 30,2010 increased 3.1% or $28.5 million, compared to $922.6 million at December 31,2009.  The increases in average assetswere primarily the result of an increase in investment securities.

 

**Securities**

 

Available-for-sale securities are an integral part of theasset/liability management process for First Farmers and Merchants Bank (the “Bank”),the Corporation’s sole direct subsidiary. Accordingly, they represent an important source of liquidity availableto fund loans and accommodate asset reallocation strategies dictated by changesin the Bank’s operating and tax plans, shifting yield spread relationships andchanges in configuration of the yield curve. At June 30, 2010, the Bank’s investment securities portfolio had$212.4 million available-for-sale securities, which are valued at fair marketvalue, and $40.7 million held-to-maturity securities, which are valued at coston the balance sheet. These compare to $208.2 million of available-for-salesecurities and $47.6 million of held-to-maturity securities as of December 31,2009.

 

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**Loans**

 

The loan portfolio is the largest component of earning assets for theBank and, consequently, provides the highest amount of revenues for theCorporation.  The loan portfolio alsocontains the highest exposure to risk as a result of the possibility ofunexpected deterioration in the credit quality of borrowers.  When analyzing potential loans, management ofthe Bank assesses both interest rate objectives and credit quality objectivesin determining whether to make a given loan and the appropriate pricing forthat loan.  All loans are expected to berepaid from cash flow or proceeds from the sale of selected assets of theborrowers.  Collateral requirements forthe loan portfolio are based on credit evaluation of the borrowers.

 

The loan portfolio decreased slightly during the second quarter, makingthis the third consecutive quarterly decline in loans outstanding.  Loan growth has been sluggish in 2010, asboth the commercial and retail portfolios experienced some deterioration in thefirst six months of the year.  The Bankcontinues to carry a concentration in 1-4 family residential first mortgagelending, but this portfolio declined in the first six months of 2010.  On the commercial side, the Bank continues toexperience growth in the non-farm, non-residential real estate portfolio.  Over half of the Bank’s exposure is inowner-occupied real estate, rather than commercial real estate, which isdependent on the lease, sale, or refinance of the underlying collateral.  Higher reserves are being placed againstproperty types which are perceived to be higher risk, such as retail and multi-familyreal estate.

 

Real estate loans represented 79.6% of total loans at June 30,2010 compared to 77.0% at June 30, 2009 and 79.5% at December 31,2009.  Management of the Bank believesthe risk of this concentration is acceptable given the quality of underwritingand the low level of historical loss experience.  The Bank’s construction and developmentportfolio has decreased by $2.1 million in the last six months, as existingconstruction projects have been completed and few new projects have come in toreplace them.  Construction anddevelopment loans represented 6.0% of total loans as of June 30, 2010,compared to 4.8% at June 30, 2009 and 6.7% at December 31, 2009.  The Bank continues to reserve more heavilyagainst its construction and development portfolio than any other segment ofthe commercial portfolio, given the comparatively high level of losses thathave been incurred within this segment of the portfolio over the previous year.

 

The analysis and review of asset quality by the Bank’s credit administrationincludes a formal review that evaluates the adequacy of the allowance forpossible loan and lease losses.  Thisreview is updated monthly and evaluated in more detail quarterly in conjunctionwith loan review reports and evaluations that are discussed in meetings withloan officers, credit administration and the Bank’s Board of Directors.  No reserve is placed against loans that arerisk rated “1”, as these loans are all cash-secured.  A separate methodology is used for thecriticized and classified portfolios (risk ratings 6-8), and the Bank’shistorical loss methodology is utilized for the pass-grade ratings (riskratings 2-5) of the commercial portfolio. Several smaller segments of the commercial portfolio saw an increase inloss rates in the second quarter.   Property types that are deemed to be higher-risk forms of collateral andpresent the highest likelihood of credit losses now carry correspondinglyhigher reserves.   The allowance forpossible loan and lease losses was $9.3 million, or 1.6% of gross loans andleases, at June 30, 2010, compared to $8.9 million, or 1.5%, at December 31,2009.  Net charge-offs through June 30,2010 were $1.1 million, resulting in an annualized net charge-off ratio of0.4%.

 

A formal process is in place to enhance control over the underwritingof loans and to monitor loan collectability. This process includes education and training of personnel about the Bank’sloan policies and procedures, assignment of credit analysts to support lenders, timely identification of loans withadverse characteristics, control of corrective actions and objective monitoringof loan reviews.  The Special AssetsDepartment of the Bank identifies and monitors assets that need special attention.  At June 30, 2010, this process identifiedloans totaling $10.6 million, or 1.9% of the portfolio, that were classified asother assets especially mentioned, compared to loans totaling $8.7 million, or1.5% of the portfolio, so classified at December 31, 2009.  Loans totaling $18.8 million, or 3.3% of theportfolio, were classified as substandard at June 30, 2010, compared toloans totaling $25.5 million, or 4.4% of the portfolio, so classified at December 31,2009.  Loans totaling $3.9 million, or0.7% of the portfolio, were classified as doubtful at June 30, 2010,compared to no loans at December 31, 2009.

 

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**Deposits**

 

The Bank does not have anyforeign offices and all deposits are serviced in its 17 domestic offices.  The Bank’s average deposits increased 4.3%during the first six months of 2010 compared to an increase of 7.0% in thefirst six months of 2009.  Average totalnoninterest-bearing deposits were 15.1% of total deposits at June 30,2010, contributing to the Bank’s low cost of deposits, compared to 15.4% at December 31,2009.

 

**RegulatoryRequirements for Capital**

 

The Corporation and the Bank are subject to federal regulatoryrisk-adjusted capital adequacy standards. Failure to meet capital adequacy requirements could result in certainmandatory, and possibly additional discretionary, actions by regulators thatcould have a direct material adverse effect on the financial condition of theCorporation and the Bank.  Federalregulations require the Corporation and the Bank to meet specific capitaladequacy guidelines that involve quantitative measures of assets, liabilitiesand certain off-balance-sheet items as calculated under regulatory accountingpractices.  The capital classification isalso subject to qualitative judgments by the regulators about components, riskweightings and other factors.

 

Under federal regulatorystandards, to be “well-capitalized,” the Bank’s Tier 1 Risk-Based Capital Ratio(ratio of Tier 1 Capital to risk-weighted assets) must be at least 6%, itsTotal Risk-Based Capital Ratio (ratio of total capital to risk-weighted assets)must be at least 10%, and its Tier 1 Leverage Capital Ratio (ratio of Tier 1Capital to average assets) must be at least 5%. Equity capital (net of certain adjustments for intangible assets andinvestments in non-consolidated subsidiaries and certain classes of preferredstock) and other certain equity like instruments are considered Tier 1Capital.  Tier 2 Capital consists of corecapital plus supplementary or temporary capital such as subordinated debt, sometypes of preferred stock, and a defined percentage of the allowance forpossible loan and lease****losses.

 

As of June 30, 2010,the Bank’s Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio andTier 1 Leverage Capital Ratios were 14.6%, 15.9%, and 10.1%, respectively,compared to 14.6%, 15.8%, and 10.2% at December 31, 2009. At June 30,2010, the Corporation’s Tier 1 Risk-Based Capital Ratio, Total Risk-BasedCapital Ratio and Tier 1 Leverage Capital Ratios were 15.0%, 16.3% and 10.4%,respectively.  The ratios were 14.9%,16.2% and 10.5%, respectively, at December 31, 2009.  Management believes, as of June 30,2010, that the Corporation and the Bank each met all capital adequacyrequirements to which they are subject.

 

**LIQUIDITYAND CAPITAL****RESOURCES**

 

Most of the capital needs ofthe Bank historically have been financed with retained earnings and depositsreceived, and the Corporation’s primary source of liquidity has been dividendsdeclared by the Bank.  In March 2008,the Bank obtained five advances at $7 million each from the FHLB.  The first two scheduled repayment of theadvances were made in March 2009 and March 2010.  The remaining payments will continue each March through2013.   In September 2008, the Bankobtained two additional advances of $3.1 million each for a total borrowing in2008 of $41.2 million.  The borrowingsfrom the FHLB have been used generally for investment strategies to enhance theBank’s portfolio.   Please refer to Note5 in the notes to consolidated financial statements for additional informationabout borrowings from the FHLB and the repayment schedule of such borrowings.

 

The Bank is subject toTennessee statutes and regulations that impose restrictions on the amount ofdividends that may be declared. Furthermore, any dividend payments are subject to the continuing abilityof the Bank to maintain its compliance with minimum federal regulatory capitalrequirements and to retain its characterization under federal regulations as a “well-capitalized”institution. The Bank declared a $0.37 per share dividend in the second quarterof 2010, which was paid in the third quarter of 2010.  Management believes that the Corporation’straditional sources of cash generated from the Bank’s operating activities areadequate to meet the Corporation’s liquidity needs for normal ongoingoperations.  The Bank’s Board ofDirectors has adopted a liquidity policy that outlines specific liquiditytarget balances.  Compliance with thispolicy is reviewed quarterly by the Bank’s Asset/Liability Committee andresults are reported to the Bank’s Board of Directors.

 

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The Bank’s formal asset and liability management process is used tomanage interest rate risk and assist management in maintaining reasonablestability in the gross interest margin as a result of changes in the level ofinterest rates and/or the spread relationships among interest rates.  The Bank uses an earnings simulation model toevaluate the impact of different interest rate scenarios on the grossmargin.  Each quarter, the Bank’sAsset/Liability Committee monitors the relationship of rate sensitive earningassets to rate sensitive interest-bearing liabilities (interest ratesensitivity), which is the principal factor in determining the effect thatfluctuating interest rates will have on future net interest income.  Rate sensitive earning assets and interestbearing liabilities are financial instruments that can be repriced to currentmarket rates within a defined time period.

 

**CRITICAL ACCOUNTING POLICIES**

 

The accounting principles the Bank follows and the methods of applyingthese principles conform with accounting principles generally accepted in theUnited States and with general practices within the banking industry.  In connection with the application of thoseprinciples, the Bank’s management has made judgments and estimates that withrespect to the determination of the ALLL and the recognition of deferred incometax assets, have been critical to the determination of the Corporation’sfinancial position, results of operations and cash flows.

 

*Allowance for Loan and LeaseLosses*

 

The Bank’s managementassesses the adequacy of the ALLL prior to the end of each month and prepares amore formal review quarterly to assess the risk in the Bank’s loanportfolio.  This assessment includesprocedures to estimate the allowance and test the adequacy and appropriatenessof the resulting balance.  The ALLLrepresents calculated amounts for specifically identified credit exposure andexposures readily predictable by historical or comparative experience.  Even though this calculation considersspecific credits, the entire allowance is available to absorb any creditlosses.

 

These calculated amounts aredetermined by assessing loans identified as not in compliance with loanagreements.  These loans are generally intwo different risk groups.  One group isunique loans (commercial loans, including those loans consideredimpaired).  The second group consists ofpools of homogenous loans (generally retail and mortgage loans).  The calculation for unique loans is basedprimarily on risk rating grades assigned to each of these loans as a result ofthe Bank’s loan management and review processes.  Each risk-rating grade is assigned a lossratio, which is determined based on the experience of management, discussionswith banking regulators and the independent loan review process.  The amount allocated for an impaired loan isbased on estimated cash flows discounted at the loan’s original effectiveinterest rate or the underlying collateral value.  Historical data, including actual lossexperience on specific types of homogenous loans, is used to allocate amountsfor loans or groups of loans meeting the specified criteria.  Management has implemented procedures thatgive more detailed historical data by category of retail and consumer creditand performance characteristics to broaden the analysis and improve monitoringof potential credit risk.

 

Criteria considered andprocesses utilized in evaluating the adequacy of the ALLL are:

·             Portfolio quality trends;

·             Changes in the nature andvolume of the portfolio;

·             Present and prospectiveeconomic and business conditions, locally and nationally;

·                  Management review systemsand board oversight, including external loan review processes;

·                  Changes in credit policy,credit administration, portfolio management and procedures;

·             Changes in personnel,management and staff; and

·             Existence and effect of anyconcentrations of credit.

 

In assessing the adequacy ofthe ALLL, the risk characteristics of the entire loan portfolio areevaluated.  This process includes thejudgment of the Bank’s management, input from independent loan reviews andreviews that may have been conducted by bank regulators as part of their usualexamination process.

 

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*Deferred Income Tax Assets*

 

As of June 30, 2010 and December 31, 2009, the deferredincome tax asset was $5.4 million and was included with other assets on thebalance sheet.  Deferred income taxassets consist mainly of the tax effect of excess provisions for loan and lease****losses over actual losses incurred and deferredcompensation.  Management believes thatit is more likely than not that these assets will be realized in future years.

 

**RESULTS OF OPERATIONS**

 

Total interest income for the first six months of 2010 was $20.2million compared to $20.3 million for the first six months of 2009 and $10.2million for the three months ended June 30, 2010 compared to $10.0 millionfor the three months ended June 30, 2009.  Interest and fees earned on loans and investments are the components oftotal interest income.  Interest and feesearned on loans were $15.9 million, an increase of approximately $155,000, or1%, during the first six months of 2010 compared to the first six months of2009 and $8.1 million for the three months ended June 30, 2010, anincrease of approximately $148,000, or 1.9% compared to the three months ended June 30,2009.  Nominal interest earned oninvestment securities and other investments was $4.3 million, a decrease ofapproximately $254,000, or 5.6%, during the first six months of 2010 comparedto the first six months of 2009 and $2.1 million for the three months ended June 30,2010, a decrease****of approximately $5,000, or0.24%, compared to the three months ended June 30, 2009.  The decrease in nominal interest earned oninvestment securities and other investments was primarily the result of marketconditions.

 

Total interest expense inthe first six months of 2010 was $3.7 million, a decrease of $1.2 million, or24.7%, compared to the first six months of 2009 and $1.8 million for the threemonths ended June 30, 2010, a****decrease ofapproximately $589,000 compared to the three months ended June 30,2009.  The lower interest rates forcertificates of deposits and public funds during the second quarter of 2010were the primary reason for the lower expense. As a policy, budgeted financial goals are monitored on a quarterly basisby the Bank’s Asset/Liability Committee, which reviews the actual dollar changein net interest income for different interest rate movements.  A negative dollar change in net interestincome for a 12-month and 24-month period of less than 10.0% of net interestincome given a 100 to 200 basis point shift in interest rates is considered anacceptable rate risk position.  The raterisk analysis for the 24-month period beginning July 1, 2010 and ending June 30,2012 showed a worst-case potential change to net interest income, in the veryunlikely event of a down 100 bps in interest rates, of 4.4%, or a decrease innet interest income of $1.4 million by the end of the period.

 

Net interest income of theCorporation on a fully taxable equivalent basis is influenced primarily bychanges in:

(1)           the volume and mix of earning assets and sources offunding;

(2)           market rates of interest; and

(3)           income tax rates.

 

The impact of some of thesefactors can be controlled by management policies and actions.  External factors also can have a significantimpact on changes in net interest income from one period to another.  Some examples of such factors are:

(1)                                  the strength ofcredit demands by customers;

(2)                                  Federal ReserveBoard monetary policy; and

(3)                                  fiscal and debtmanagement policies of the federal government, including changes in tax laws.

 

The net interest margin, ona tax equivalent basis, at June 30, 2010, June 30, 2009 and December,31, 2009 was 4.16%, 4.01% and 4.10%, respectively.

 

Additions of approximately$405,000 were made to the provision for possible loan and lease losses in thesecond quarter of 2010 as a result of an increase in the level of credit losseson both secured and unsecured consumer loans as well as the Bank having todowngrade the credit level on a few commercial loans.

 

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Noninterest income was $5.1million, a decrease of $2.5 million, or 32.9%, during the first six months of2010 compared to the first six months of 2009 and a decrease of approximately$929,000, or 28.9% during the three months ended June 30, 2010 compared tothe three months ended June 30, 2009. The gains on sales of available-for-sale securities, which representedapproximately $502,000 in income during the first six months in 2010 and nogains in the three months ended June 30, 2010, compared to gains on salesof available-for-sale securities in the first six months of 2009, whichrepresented approximately $528,000 in the first six months of 2009, whichrepresented $2.4 million in the second quarter of 2009, were the primary reasonfor the variance in the first six months of 2010.

 

Noninterest expense,excluding the provision for possible loan and lease losses was $16.9 million,an increase of approximately $643,000, or 4.0%, in the first six months of 2010as compared to the first six months of 2009 and a decrease of approximately$31,000, or 0.4%, during the three months ended June 30, 2010 compared tothe three months ended June 30, 2009. One of the reasons for the higher noninterest expense in the first sixmonths was the increased expense to maintain other real estate.  The Bank had approximately $360,000 in thefirst six months of 2010, compared to only approximately $35,000 in first sixmonths of 2009.

 

The Corporation does nothave any long-term debt or other long-term obligations; however, in 2008, theBank received a $41.2 million advance from the FHLB.   The scheduled $7.0 million annual principalmaturities of borrowings under this credit line began in March 2009 andwill end in 2013.  Please refer to Note 5in the notes to consolidated financial statements included in this report foradditional information about borrowings from the FHLB.

 

The Bank also leases a certain number of its properties.  There was no change during the three-monthperiod ended June 30, 2010 in the terms of these leases.

 

Net income for the six months ended June 30, 2010 and the threemonths ended June 30, 2010 was $3.1 million and $1.9 million,respectively, compared to $4.4 million and $1.7 million for the six monthsended June 30, 2009 and the three months ended June 30, 2009,respectively.  An increase in operatingexpenses and losses on other real estate contributed to the six monthdecrease.  The Corporation earned $0.57per share in the second quarter of 2010 and $0.80 per share in the secondquarter of 2009.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

The Bank is a party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit and stand-by letters of credit.  These instruments involve, to varyingdegrees, elements of credit risk in excess of the amount recognized in thebalance sheet.  The contract or notionalamounts of those instruments reflect the extent of involvement the Bank has inthose financial instruments.  Loancommitments are agreements to lend to a customer as long as there is not aviolation of any condition established in the loan commitment contract.  Stand-by letters of credit are conditionalcommitments issued by the Bank to guarantee the performance of a customer to athird party.  Those guarantees areprimarily issued to support public and private borrowing arrangements,including commercial paper, bond financing and similar transactions.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in making a loan.

 

The total outstanding balance of loan commitments and stand-by lettersof credit in the normal course of business at June 30, 2010 were $102.5million and $9.3 million, respectively, compared to $108.3 million and $9.5million, respectively, at June 30, 2009.

 

At June 30, 2010, the Corporation and the Bank did not have anyoff-balance sheet arrangements other than commitments to extend credit andstand-by letters of credit.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk.**

 

During the six months ended June 30, 2010, there were no materialchanges in the quantitative and qualitative disclosures about market risk presentedin the Corporation’s Annual Report on Form 10-K for the year ended December 31,2009.

 

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**Item 4.  Controls and Procedures.**

 

(a) Evaluation of Disclosure Controls and Procedures.  The Corporation, with the participation ofits management, including the Corporation’s Chief Executive Officer andAssistant Treasurer (principal financial officer), carried out an evaluation ofthe effectiveness of the design and operation of its disclosure controls andprocedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act)as of the end of the period covered by this report.  Based upon that evaluation and as of the endof the period covered by this report, the Corporation’s Chief Executive Officerand Assistant Treasurer (principal financial officer) concluded that theCorporation’s disclosure controls and procedures were effective in ensuringthat information required to be disclosed in its reports that the Corporationfiles or submits to the SEC under the Exchange Act is recorded, processed,summarized and reported on a timely basis.

 

(b) Changes in Internal Control Over Financial Reporting.  There has been no change in the Corporation’sinternal control over financial reporting that occurred during the secondquarter of 2010 that has materially affected, or is reasonably likely tomaterially affect, the Corporation’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1A. Risk Factors.**

 

Except as set forth below,there have been no material changes in the risk factors previously disclosed inthe Corporation’s Annual Report on Form 10-K for the year ended December 31,2009.

 

***Recently enacted financialregulatory reforms could have a significant impact on our business, financialcondition and results of operations.***

 

On July 21, 2010, the President signed the Dodd-Frank Wall StreetReform and Consumer Protection Act into law. The law includes, among otherthings:

 

·                  the creation of a Financial ServicesOversight Council to identify emerging systemic risks and improve interagencycooperation;

 

·                  the elimination of the Office of ThriftSupervision and the transfer of oversight of federally chartered thriftinstitutions to the Office of the Comptroller of the Currency;

 

·                  the creation of a Consumer FinancialProtection Agency authorized to promulgate and enforce consumer protectionregulations relating to financial products, which would affect both banks andnon-bank finance companies;

 

·                  the establishment of strengthened capital andprudential standards for banks and bank holding companies;

 

·                  enhanced regulation of financial markets,including derivatives and securitization markets;

 

·                  the elimination of certain trading activitiesfrom banks;

 

·                  a permanent increase of the previouslyimplemented temporary increase of FDIC deposit insurance to $250,000; and

 

·                  the creation of an Office of NationalInsurance within Treasury.

 

While the bill has beensigned into law, a number of provisions of the law remain to be implementedthrough the rulemaking process at various regulatory agencies. Management isunable to predict what the final form of these rules will be whenimplemented by the respective agencies, but management believes that certainaspects of the new legislation, including, without limitation, the additionalcost of higher deposit insurance and the costs of compliance with disclosureand reporting requirements and examinations by the new Consumer FinancialProtection Agency, could have a significant impact on our business, financialcondition and results of operations. Additionally, management cannot predictwhether there will be additional proposed laws or reforms that would affect theU.S. financial system or financial institutions, whether or when such changesmay be adopted, how such changes may be interpreted and enforced or how suchchanges may affect us.

 

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

The following table providesinformation regarding purchases of the Corporation’s common stock made by theCorporation during the second quarter of 2010:

 

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**CORPORATION’S PURCHASES OF EQUITYSECURITIES**

 
| **Period**                                     | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares that  May Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2010 —  April 30, 2010 |       | 1,500                                   | *          | $                                  | 43.20      |                                                                                          | —     |                                                                                                                       | —     |   |
| May 1, 2010 —  May 31, 2010     |       | —                                  |       | —                             |       | —                                                                                        |       | —                                                                                                                     |       |
| June 1, 2010 —  June 30, 2010   |       | —                                  |       | —                             |       | —                                                                                        |       | —                                                                                                                     |       |
| Total                                          |       | 1,500                                   |       | $                                  | 43.20      |                                                                                          | —     |                                                                                                                       | —     |   |

 

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*Purchased from third-partysellers pursuant to previously negotiated agreements to purchase.

 

**Item 6.  Exhibits.**

 
| **EXHIBIT** | ** ** | ** **      |
|-------------|------------|-----------------|
| **NUMBER**  | ** ** | **DESCRIPTION** |
|        |       |            |
| 3.1         |       |            | Charter. (1) |
|        |       |            |   |
| 3.2         |       |            | Articles of Amendment to Charter. (1) |
|        |       |            |   |
| 3.3         |       |            | Second Amended and Restated By-laws. (2) |
|        |       |            |   |
| 31.1        |       |            | Certification of the Chief Executive Officer of First Farmers and  Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, as amended, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|        |       |            |   |
| 31.2        |       |            | Certification of the Assistant Treasurer (principal financial  officer) of First Farmers and Merchants Corporation Pursuant to  Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |       |            |   |
| 32.1        |       |            | Certification of the Chief Executive Officer and Assistant Treasurer  (principal financial officer) of First Farmers and Merchants Corporation  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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(1)  Incorporated by reference from the First Farmers andMerchants Corporation Amendment No. 1 to the Annual Report on Form 10-K/Afor the year ended December 31, 2003, as filed with the Securities andExchange Commission on May 7, 2004 (File Number 000-10972).

 

(2)  Incorporated by reference from the First Farmers andMerchants Corporation Current Report on Form 8-K, as filed with theSecurities and Exchange Commission on December 21, 2009 (File Number000-10972).

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

FIRSTFARMERS AND MERCHANTS CORPORATION

(Registrant)

 

 
| Date   | August 5, 2010 |   | /s/ T. Randy Stevens                                                                                     |
|--------|---------------------|--------|----------------------------------------------------------------------------------------------------------|
|   |                |   | T. Randy Stevens, Chief Executive Officer                                                                |
|   |                |   |                                                                                                     |
|   |                |   |                                                                                                     |
| Date   | August 5, 2010 |   | /s/ Patricia P. Bearden                                                                                  |
|   |                |   | Patricia P. Bearden, Assistant Treasurer (principal financial officer  and principal accounting officer) |

 

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| **EXHIBIT** | ** ** | ** **      |
|-------------|------------|-----------------|
| **NUMBER**  | ** ** | **DESCRIPTION** |
|        |       |            |   |
| 3.1         |       |            | Charter. (1) |
|        |       |            |   |
| 3.2         |       |            | Articles of Amendment to Charter. (1) |
|        |       |            |   |
| 3.3         |       |            | Second Amended and Restated By-laws. (2) |
|        |       |            |   |
| 31.1        |       |            | Certification of the Chief Executive Officer of First Farmers and  Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange  Act of 1934, as amended, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|        |       |            |   |
| 31.2        |       |            | Certification of the Assistant Treasurer (principal financial  officer) of First Farmers and Merchants Corporation Pursuant to  Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|        |       |            |   |
| 32.1        |       |            | Certification of the Chief Executive Officer and Assistant Treasurer  (principal financial officer) of First Farmers and Merchants Corporation  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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(1)  Incorporated byreference from the First Farmers and Merchants Corporation Amendment No. 1to the Annual Report on Form 10-K/A for the year ended December 31,2003, as filed with the Securities and Exchange Commission on May 7, 2004(File Number 000-10972).

 

(2)  Incorporated by reference from the First Farmers andMerchants Corporation Current Report on Form 8-K, as filed with theSecurities and Exchange Commission on December 21, 2009 (File Number000-10972).

 

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