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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark one)**

 
| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2009**

 

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from                to                **

 

**CommissionFile Numbers: 000-10972**

 

**First Farmers and Merchants Corporation**

(Exact name of registrantas specified in its charter)

 

| **Tennessee**                                                   | ** ** | **62-1148660**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **816 South  Garden Street**                                    | ** ** | ** **                            |
| **Columbia,  Tennessee**                                        | ** ** | **38402-1148**                        |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

**931-388-3145**

(Registrant’s telephonenumber, including area code)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  o Yes  o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). o Yes xNo

 

As of November 5,2009, the registrant had outstanding 5,506,993 shares of common stock.

 

 

 

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**PART I - FINANCIAL INFORMATIO**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 — September 30, 2009 and December 31, 2008.                                               |
|   |                                                                                                                                  |
|   | Consolidated  statements of income - For the three months and nine months ended  September 30, 2009 and September 30, 2008. |
|   |                                                                                                                                  |
|   | Consolidated  statements of cash flows - For the nine months ended September 30, 2009  and September 30, 2008.              |
|   |                                                                                                                                  |
|   | Selected notes  to consolidated financial statements.                                                                                 |

 

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**FIRSTFARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                           | ** ** | ** **             | ** **  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **September 30,** | ** **  | **2008**   | ** **            |
| **(Dollars in Thousands,  Except Per Share Data)**                                                                                                                                                   | ** ** | **2009**               | ** **  | **(1)**    | ** **            |
| ** **                                                                                                                                                                                           | ** ** | **(Unaudited)**        | ** **  | ** ** | ** **            |
| **ASSETS**                                                                                                                                                                                           |       |                   |        |       |                  |
| Cash and due from banks                                                                                                                                                                              | ** ** | **$**                  | **14,324**  |       | $                     | 22,656     |   |
| Interest-bearing due from banks                                                                                                                                                                      | ** ** | **6,773**              |        | 4,680      |                  |
| Federal funds sold                                                                                                                                                                                   | ** ** | **10,925**             |        | 4,200      |                  |
| Total cash and cash  equivalents                                                                                                                                                                     | ** ** | **32,022**             |        | 31,536     |                  |
| Securities                                                                                                                                                                                           |       |                   |        |       |                  |
| Available-for-sale  (amortized cost $201,998 and $171,891, respectively)                                                                                                                             |       | **204,241**            |        | 174,493    |                  |
| Held-to-maturity  (fair market value $51,857 and $59,558, respectively)                                                                                                                              |       | **49,903**             |        | 59,427     |                  |
| Total securities                                                                                                                                                                                     | ** ** | **254,144**            |        | 233,920    |                  |
| Loans, net of deferred fees                                                                                                                                                                          | ** ** | **588,553**            |        | 595,519    |                  |
| Allowance for loan losses                                                                                                                                                                            | ** ** | **(8,548**             | **)**       | (8,625     | )                     |
| Net loans                                                                                                                                                                                            | ** ** | **580,005**            |        | 586,894    |                  |
| Bank premises  and equipment, at cost less allowance for depreciation                                                                                                                                |       | **20,695**             |        | 17,669     |                  |
| Core deposit and other intangibles                                                                                                                                                                   | ** ** | **9,130**              |        | 9,186      |                  |
| Other assets                                                                                                                                                                                         | ** ** | **35,478**             |        | 31,932     |                  |
| TOTAL ASSETS                                                                                                                                                                                         | ** ** | **$**                  | **931,474** |       | $                     | 911,137    |   |
| **LIABILITIES**                                                                                                                                                                                      | ** ** | ** **             | ** **  |       |                  |       |   |
| Deposits                                                                                                                                                                                             |       |                   |        |       |                  |
| Noninterest-bearing                                                                                                                                                                                  | ** ** | **$**                  | **108,777** |       | $                     | 118,111    |   |
| Interest-bearing  (including certificates of deposits over $100: 2009 - $100,092; 2008 -  $107,607)                                                                                                  |       | **659,788**            |        | 626,740    |                  |
| Total deposits                                                                                                                                                                                       | ** ** | **768,565**            |        | 744,851    |                  |
| Federal funds  purchased and securities sold under agreements to repurchase                                                                                                                          |       | **6,386**              |        | 2,645      |                  |
| Dividends payable                                                                                                                                                                                    | ** ** | **—**             |        | 2,009      |                  |
| Short-term borrowings                                                                                                                                                                                | ** ** | **432**                |        | 294        |                  |
| Accounts payable and accrued liabilities                                                                                                                                                             | ** ** | **14,650**             |        | 12,985     |                  |
| Federal Home Loan Bank advances                                                                                                                                                                      | ** ** | **34,177**             |        | 41,177     |                  |
| TOTAL LIABILITIES                                                                                                                                                                                    | ** ** | **824,210**            |        | 803,961    |                  |
| **SHAREHOLDERS’****EQUITY**                                                                                                                                                                     | ** ** | ** **             |        |       |                  |
| Common stock -  $10 par value per share, 8,000,000 shares authorized; 5,506,993 and 5,580,000  shares issued and outstanding as of September 30, 2009 and December 31,  2008, respectively |       | **55,070**             |        | 55,800     |                  |
| Retained earnings                                                                                                                                                                                    | ** ** | **50,720**             |        | 49,776     |                  |
| Accumulated other comprehensive income                                                                                                                                                               | ** ** | **1,379**              |        | 1,600      |                  |
| TOTAL FIRST FARMERS CORPORATION SHAREHOLDERS’ EQUITY                                                                                                                                            | ** ** | **107,169**            |        | 107,176    |                  |
| Non-controlling interest                                                                                                                                                                             | ** ** | **95**                 |        | 95         |                  |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                                                                      | ** ** | **107,264**            |        | 107,271    |                  |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                     |       | **$**                  | **931,474** |       | $                     | 911,137    |   |

 

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(1) Derived from auditedfinancial statements.

The accompanying notes are anintegral part of consolidated financial statements.

 

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**FIRST FARMERS AND MERCHANTSCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Month Ended**   | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(Dollars  in Thousands Except Per Share Data)**              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Unaudited)**                                                | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                     |       |                   |       |                   |       |   |   |   |   |
| **INTEREST AND DIVIDEND INCOME**                               | ** ** | ** **             |       |                   | ** ** | ** ** |   |   |   |
| Interest and fees on loans                                     | ** ** | **$**                  | **8,022**  |                   | $          | 8,202 | ** ** | **$** | **23,799** |   | $ | 24,680 |   |
| Income on investment securities                                | ** ** | ** **             |       |                   | ** ** | ** ** |   |   |   |
| Taxable interest                                               | ** ** | **1,205**              |       | 1,690                  | ** ** | **3,650** |   | 4,991 |   |
| Exempt from federal income tax                                 | ** ** | **936**                |       | 924                    | ** ** | **2,855** |   | 2,882 |   |
| Dividends                                                      | ** ** | **51**                 |       | 4                      | ** ** | **157** |   | 110 |   |
| ** **                                                     |       | **2,192**              |       | 2,618                  | ** ** | **6,663** |   | 7,983 |   |
| Other interest income                                          | ** ** | **10**                 |       | 106                    | ** ** | **55** |   | 234 |   |
| TOTAL INTEREST INCOME                                          |       | **10,224**             |       | 10,926                 | ** ** | **30,516** |   | 32,897 |   |
| ** **                                                     |       |                   | ** ** | ** **             |       |   |   |   |   |
| **INTEREST EXPENSE**                                           |       |                   | ** ** | ** **             |       |   |   |   |   |
| Interest on deposits                                           | ** ** | **1,870**              |       | 2,749                  | ** ** | **6,196** |   | 9,014 |   |
| Interest on other borrowings                                   | ** ** | **278**                |       | 279                    | ** ** | **881** |   | 523 |   |
| TOTAL INTEREST EXPENSE                                         | ** ** | **2,148**              |       | 3,028                  | ** ** | **7,077** |   | 9,537 |   |
| NET INTEREST INCOME                                            | ** ** | **8,076**              |       | 7,898                  | ** ** | **23,439** |   | 23,360 |   |
| PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES                   | ** ** | **405**                |       | 50                     | ** ** | **1,830** |   | 50 |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN AND  LEASE LOSSES |       | **7,671**              |       | 7,848                  | ** ** | **21,609** |   | 23,310 |   |
| ** **                                                     |       |                   | ** ** | ** **             |       | **—** |   |   |   |
| **NONINTEREST INCOME**                                         |       |                   | ** ** | ** **             |       | ** ** |   |   |   |
| Trust department income                                        | ** ** | **475**                |       | 625                    | ** ** | **1,469** |   | 1,882 |   |
| Service fees on deposit accounts                               | ** ** | **1,854**              |       | 2,002                  | ** ** | **5,408** |   | 5,839 |   |
| Other fees and commissions                                     | ** ** | **106**                |       | 91                     | ** ** | **346** |   | 328 |   |
| Other operating income                                         | ** ** | **225**                |       | 416                    | ** ** | **592** |   | 828 |   |
| Securities gains                                               | ** ** | **—**             |       | 177                    | ** ** | **2,482** |   | 1,305 |   |
| TOTAL NONINTEREST INCOME                                       |       | **2,660**              |       | 3,311                  | ** ** | **10,298** |   | 10,182 |   |
| ** **                                                     |       |                   | ** ** | ** **             |       |   |   |   |   |
| **NONINTEREST EXPENSE**                                        |       |                   | ** ** | ** **             |       |   |   |   |   |
| Salaries and employee benefits                                 | ** ** | **4,269**              |       | 4,279                  | ** ** | **12,583** |   | 12,858 |   |
| Net occupancy expense                                          | ** ** | **728**                |       | 670                    | ** ** | **1,997** |   | 1,910 |   |
| Furniture and equipment expense                                | ** ** | **285**                |       | 249                    | ** ** | **833** |   | 752 |   |
| Other operating expenses                                       | ** ** | **3,273**              |       | 2,674                  | ** ** | **9,359** |   | 8,174 |   |
| TOTAL NONINTEREST EXPENSES                                     | ** ** | **8,555**              |       | 7,872                  | ** ** | **24,772** |   | 23,694 |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES                       | ** ** | **1,776**              |       | 3,287                  | ** ** | **7,135** |   | 9,798 |   |
| PROVISION FOR INCOME TAXES                                     |       | **112**                |       | 450                    | ** ** | **1,038** |   | 1,696 |   |
| NET INCOME                                                     |       | **$**                  | **1,664**  |                   | $          | 2,837 | ** ** | **$** | **6,097** |   | $ | 8,102 |   |
|                                                           |       | ** **             |       |                   | ** ** | ** ** |   |   |   |
| **BASIC EARNINGS PER SHARE**                                   |       | ** **             |       |                   | ** ** | ** ** |   |   |   |
| Weighted Average Shares Outstanding                            | ** ** | **5,522,498**          |       | 5,619,027              | ** ** | **5,547,930** |   | 5,662,428 |   |
| ** **                                                     | ** ** | **$**                  | **0.30**   | ** **             | **$**      | **0.50** | ** ** | **$** | **1.10** |   | $ | 1.43 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

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**FIRSTFARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| **(Dollars  in Thousands)**                                                        | ** ** | **Nine Months Ended September  30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(Unaudited)**                                                                    | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **OPERATING ACTIVITIES**                                                           | ** ** | ** **                           |       |   |   |
| Net income                                                                         | ** ** | **$**                                | **6,097**  |   | $ | 8,102 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: | ** ** | ** **                           |       |   |   |
| Deficiency of  provision for possible loan losses over net charge-offs             | ** ** | **(77**                              | **)**      | (25 | ) |
| Provision for  depreciation and amortization of premises and equipment             | ** ** | **911**                              |       | 763 |   |
| Securities gains                                                                   | ** ** | **(2,482**                           | **)**      | (1,305 | ) |
| Loss from disposition of fixed assets                                              | ** ** | **129**                              |       | — |   |
| (Gain) loss from disposition of other real estate                                  | ** ** | **(8**                               | **)**      | 300 |   |
| Amortization of deposit base intangibles                                           | ** ** | **56**                               |       | 113 |   |
| Amortization of  investment security premiums, net of accretion of discounts       | ** ** | **990**                              |       | 223 |   |
| Increase in cash surrender value of life insurance  contracts                      | ** ** | **(177**                             | **)**      | (1,141 | ) |
| (Increase) decrease in Deferred income taxes                                       | ** ** | **15**                               |       | (304 | ) |
| Interest receivable                                                                | ** ** | **(542**                             | **)**      | 568 |   |
| Other assets                                                                       | ** ** | **(2,115**                           | **)**      | 446 |   |
| Increase (decrease) in                                                             | ** ** | ** **                           |       |   |   |
| Interest payable                                                                   | ** ** | **(239**                             | **)**      | (1,035 | ) |
| Other liabilities                                                                  | ** ** | **1,999**                            |       | 2,767 |   |
| Total adjustments                                                                  | ** ** | **(1,540**                           | **)**      | 1,370 |   |
| Net cash provided by operating activities                                          |       | **4,557**                            |       | 9,472 |   |
| **INVESTING  ACTIVITIES**                                                          | ** ** | ** **                           |       |   |   |
| Proceeds from  maturities, calls, and sales of available-for-sale securities       | ** ** | **162,801**                          |       | 109,290 |   |
| Proceeds from maturities and calls of held-to-maturity  securities                 | ** ** | **9,524**                            |       | 11,991 |   |
| Purchases of  investment securities Available-for-sale                             | ** ** | **(191,416**                         | **)**      | (112,755 | ) |
| Net increase (decrease) in loans                                                   | ** ** | **6,966**                            |       | (57,627 | ) |
| Proceeds from sale of other real estate                                            | ** ** | **37**                               |       | 406 |   |
| Purchase of life insurance premium                                                 | ** ** | **(833**                             | **)**      | (696 | ) |
| Purchases of premises and equipment                                                | ** ** | **(4,066**                           | **)**      | (2,523 | ) |
| Net cash used in  investing activities                                             |       | **(16,987**                          | **)**      | (51,914 | ) |
| **FINANCING  ACTIVITIES**                                                          | ** ** | ** **                           |       |   |   |
| Net increase in  noninterest-bearing and interest-bearing deposits                 | ** ** | **23,715**                           |       | 20,271 |   |
| Net increase (decrease) in short term borrowings                                   | ** ** | **3,878**                            |       | (855 | ) |
| Proceeds (payments) from FHLB borrowings                                           | ** ** | **(7,000**                           | **)**      | 41,177 |   |
| Repurchase of Common Stock                                                         | ** ** | **(3,650**                           | **)**      | (3,750 | ) |
| Cash dividends                                                                     | ** ** | **(4,027**                           | **)**      | (3,988 | ) |
| Net cash provided by financing activities                                          |       | **12,916**                           |       | 52,855 |   |
| Increase in cash and cash equivalents                                              | ** ** | **486**                              |       | 10,413 |   |
| Cash and cash equivalents at beginning of period                                   | ** ** | **31,536**                           |       | 35,873 |   |
| Cash and cash equivalents at end of period                                         |       | **$**                                | **32,022** |   | $ | 46,286 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 — OTHER INFORMATION**

 

The interim unauditedconsolidated financial statements of First Farmers and Merchants Corporation(the “Corporation”) presented in this report have been prepared on a consistentbasis and in accordance with the instructions to Form 10-Q and do notinclude all of the information and notes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included.  These adjustments were of a normal, recurringnature and consistent with generally accepted accounting principles.  For further information, refer to theconsolidated financial statements and notes included in the Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2008.   The Corporation has evaluated subsequentevents for potential recognition and/or disclosure through November 6,2009, the date the consolidated financial statement included in this QuarterlyReport on Form 10-Q were issued. Certain reclassifications have been made to prior year amounts tomaintain consistency with the current year with no impact on net income and anincrease of $95,000 to total shareholders’ equity, in accordance with FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 810, “Consolidation”.

 

**NOTE 2 — STOCK REPURCHASE**

 

Duringthe third quarter of 2009, the Corporation repurchased, from third-partysellers, 23,007 shares of the Corporation’s common stock at a previouslynegotiated price of $50 per share for an aggregate purchase price of $1.15million.

 

**NOTE 3 — ACCOUNTING STANDARDS CODIFICATION**

 

TheFASB ASC became effective on July 1, 2009. At that date, the ASC becameFASB’s officially recognized source of authoritative U.S. generally acceptedaccounting principles (“GAAP”) applicable to all public and non-public non-governmentalentities, superseding existing FASB, American Institute of Certified PublicAccountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules andinterpretive releases of the SEC under the authority of federal securities lawsare also sources of authoritative GAAP for Securities and Exchange Commission(“SEC”) registrants. All other accounting literature is considerednon-authoritative. The switch to the ASC affects the way companies refer toGAAP in financial statements and accounting policies. Citing particular contentin the ASC involves specifying the unique numeric path to the content throughthe Topic, Subtopic, Section and Paragraph structure.

 

**NOTE 4 — FAIR VALUE MEASUREMENT**

 

The fair value of an asset or liability is the pricethat would be received to sell that asset or paid to transfer that liability inan orderly transaction occurring in the principal market (or most advantageousmarket in the absence of a principal market) for such asset or liability. Inestimating fair value, the Corporation utilizes valuation techniques that areconsistent with the market approach, the income approach and/or the costapproach. Such valuation techniques are consistently applied. Inputs tovaluation techniques include the assumptions that market participants would usein pricing an asset or liability. FASB ASC Topic 820, “Fair Value Measurementsand Disclosures”, establishes a fair value hierarchy for valuation inputs thatgives the highest priority to quoted prices in active markets for identicalassets or liabilities and the lowest priority to unobservable inputs. The fairvalue 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.

 

·                  *Level 2Inputs* - Inputs other than quotedprices included in Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. These might include quoted prices for similar assets orliabilities in active markets, quoted prices for identical or similar assets orliabilities in markets that are not active, inputs other than quoted pricesthat are observable for the asset or liability (such as interest rates,volatilities, prepayment speeds, credit 

 

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risks, etc.) or inputs thatare derived principally from or corroborated by market data by correlation orother means.

 

·                  *Level 3Inputs* - Unobservable inputs fordetermining the fair values of assets or liabilities that reflect an entity’sown assumptions about the assumptions that market participants would use inpricing the assets or liabilities.

 

A description of thevaluation methodologies used for instruments measured at fair value as well asthe general classification of such instruments pursuant to the valuationhierarchy is set forth below.  Thesevaluation methodologies were applied to all of the financial assets and financialliabilities of the Corporation and its sole wholly-owned subsidiary, FirstFarmers and Merchants Bank (the “Bank”), carried at fair value effective September 30,2009.  If such quoted market prices arenot available, fair value is based on internally developed models thatprimarily use, as inputs, observable market-based parameters. Valuationadjustments may be made to ensure that financial instruments are recorded atfair value. These adjustments may include amounts to reflect counterpartycredit quality and the Corporation’s creditworthiness among other things, aswell as unobservable parameters.  Anysuch valuation adjustments are applied consistently over time.  The Corporation’s valuation methodologies mayproduce a fair value calculation that may not be indicative of net realizablevalue or reflective of future fair values. While management believes the valuation methodologies are appropriateand consistent with other market participants, the use of different methodologiesor assumptions to determine the fair value of certain financial instrumentscould result in a different estimate of fair value at the reporting date.  Furthermore, the reported fair value amountshave not been comprehensively revalued since the presentation dates and,therefore, estimates of fair value after the balance sheet date may differsignificantly from the amounts presented herein.

 

Financial assets andfinancial liabilities measured at fair value on a recurring basis include thefollowing:

 

*Federal funds sold* — At September 30,2009, all the Bank’s federal funds sold were settled overnight.  As a result, the fair value of the federalfunds is their carrying amount and therefore this asset is classified as Level1 of the valuation hierarchy.

 

*Securities available for sale***—** Securities classified asavailable for sale are reported at fair value utilizing Level 2 inputs.  For these securities, the Corporation obtainsfair value measurements from an independent pricing service.  The fair value measurements considerobservable data that may include dealer quotes, market spreads, cash flows, theU.S. Treasury yield curve, live trading levels, trade execution data, marketconsensus prepayment speeds, credit information and the bond’s terms andconditions, among other things.

 

*Other assets* — Included in other assets are certain assets carriedat fair value, including the cash value of Bank-owned life insurancepolicies.  The carrying amount of theseassets is based on information received from the insurance carriers indicatingthe financial performance of the policies and the amount the Bank would receiveshould the policies be surrendered.  TheBank reflects these investments within Level 2 of the valuation hierarchy.

 

*Securities sold under repurchase agreements,federal funds purchased and other borrowings* — At September 30, 2009, all of the Bank’ssecurities sold under repurchase agreements, federal funds purchased and otherborrowings (e.g., overnight borrowings from the Federal Home Loan Bank ofCincinnati (the “FHLB”)) were settled on a short-term basis, usuallydaily.  As a result, the fair value ofthe instruments approximates their carrying amount and such liabilities areclassified as Level 2 within the valuation hierarchy.

 

*Other liabilities* — The Bank has certain liabilities carried at fairvalue.  These include future obligationspursuant to a supplemental retirement plan and proceeds of split-dollar lifeinsurance policies.  For theseobligations, the Bank discounts the anticipated future cash flows using currentinterest rates.  The liabilities areclassified as Level 2 within the valuation hierarchy.

 

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The following tablesummarizes financial assets and liabilities measured at fair value on arecurring basis as of September 30, 2009, segregated by the level of thevaluation inputs within the fair value hierarchy utilized to measure fairvalue:

 

**Assets and liabilities measured atfair value on a recurring basis as of September 30, 2009**

 
| ** **                                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Federal funds sold                          |       | $           | 10,925     |        | $          | —      |       | $         | —     |   | $ | 10,925 |   |
| Available-for-sale securities               |       | —      |       | 204,241     |       | —      |       | 204,241   |       |
| Other assets                                |       | —      |       | 21,157      |       | —      |       | 21,157    |       |
| **Total assets at fair value**              |       | $           | 10,925     |        | $          | 225,398     |       | $         | —     |   | $ | 236,323 |   |
| Securities sold under repurchase agreements |       | $           | —     |        | $          | 6,386       |       | $         | —     |   | $ | 6,386 |   |
| Other liabilities                           |       | —      |       | 5,213       |       | —      |       | 5,213     |       |
| **Total liabilities at fair value**         |       | $           | —     |        | $          | 11,599      |       | $         | —     |   | $ | 11,599 |   |

 

Certain financial assets andliabilities are measured at fair value on a nonrecurring basis. Theseinstruments are not measured at fair value on an ongoing basis but are subjectto fair value adjustments in certain circumstances (for example, when there isevidence of impairment). The only financial asset or liability measured at fairvalue on a non-recurring basis for the third quarter of 2009 was impairedloans.

 

*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 third quarter of 2009, certainimpaired loans were re-measured and reported at fair value through a specificvaluation allowance allocation of the allowance for possible loan losses basedon the fair value of the underlying collateral. Impaired loans with a carrying value of $17.5 million were reduced byspecific valuation allowance allocations totaling $1.2 million to a totalreported fair value of $16.3 million based on collateral valuations utilizingLevel 3 valuation inputs.

 

FASB ASC Topic 825, “Financial Instruments”,requires disclosure of the fair value of financial assets and financialliabilities, including those financial assets and financial liabilities thatare not measured and reported at fair value on a recurring basis ornon-recurring basis. A detailed description of the valuation methodologies usedin estimating the fair value of financial instruments is set forth in Note 12to the consolidated financial statements incorporated by reference into theCorporation’s Annual Report on Form 10-K for the year ended December 31,2008.

 

The estimated fair values offinancial instruments were as follows:

 
| ** **                                                                  | ** ** | **September 30,  2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**                 | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                  | ** ** | **Amount**                   | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial assets                                                            |       |                         |       |                       |       |   |   |   |   |
| Cash and due from banks                                                     | ** ** | **$**                        | **14,324** | ** **                 | **$**      | **14,324** |   | $ | 22,656 |   | $ | 22,656 |   |
| Interest-bearing deposits in banks                                          | ** ** | **6,773**                    | ** ** | **6,773**                  |       | 4,680 |   | 4,680 |   |
| Federal funds sold                                                          | ** ** | **10,925**                   | ** ** | **10,925**                 |       | 4,200 |   | 4,200 |   |
| Securities available-for-sale                                               | ** ** | **204,241**                  | ** ** | **204,241**                |       | 174,493 |   | 174,493 |   |
| Securities held-to-maturity                                                 | ** ** | **49,903**                   | ** ** | **51,857**                 |       | 59,427 |   | 59,558 |   |
| Loans, net                                                                  | ** ** | **580,005**                  | ** ** | **590,220**                |       | 586,894 |   | 591,471 |   |
| Accrued interest receivable                                                 | ** ** | **4,873**                    | ** ** | **4,873**                  |       | 4,331 |   | 4,331 |   |
| Financial liabilities                                                       |       |                         |       |                       |       |   |   |   |   |
| Deposits                                                                    | ** ** | **768,565**                  | ** ** | **770,004**                |       | 744,851 |   | 746,308 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | **6,386**                    |       | **6,386**                  |       | 2,645 |   | 2,645 |   |
| Other short term liabilities                                                | ** ** | **432**                      | ** ** | **432**                    |       | 294 |   | 294 |   |
| Accrued interest payable                                                    | ** ** | **1,455**                    | ** ** | **1,455**                  |       | 1,693 |   | 1,693 |   |
| Off-balance sheet credit related instruments:                               |       |                         |       |                       |       |   |   |   |   |
| Commitments to extend credit                                                | ** ** | ** **                   |       | **110**                    |       |   |   | 108 |   |
| Stand-by letters of credit                                                  | ** ** | ** **                   |       | **9**                      |       |   |   | 11 |   |
|                                                                             |            |                              |            |                            |            |  |  |  |  |  |  |  |  |

 

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**NOTE 5****—****FEDERAL HOME LOAN BANK CREDITLINE**

 

The Bank has a Blanket Agreement for Advances and SecurityAgreement (the “Blanket Agreement”) with the FHLB dated March 31,2008.  Advances made to the Bank underthe Blanket Agreement are collateralized by FHLB stock and unidentifiedqualifying residential mortgage loans totaling 150% of the outstanding amountborrowed.  The Bankmade an annual principal payment of $7.0 million to the FHLB under the BlanketAgreement on March 31, 2009.

 

Scheduled annual principal maturities of borrowings underthis credit line as of September 30, 2009, are as follows:

 

| 2010  |   | 10,077,052 |       |
|-------|--------|------------|------------|
| 2011  |   | 7,000,000  |       |
| 2012  |   | 7,000,000  |       |
| 2013  |   | 10,100,000 |       |
| Total |   | $          | 34,177,052 |   |
|       |        |            |            |  |

 

Stock held in the FHLB totaling $3.0 million at September 30,2009 is carried at cost.  The stock isrestricted and can only be sold back to the FHLB at par.

 

The Bank also has a Cash Management Advance Line of CreditAgreement (the “CMA”) dated March 31, 2009, with the FHLB.  The CMA is a component of the BlanketAgreement.  The purpose of the CMA is toassist with short-term liquidity management. Under the terms of the CMA, the Bank may borrow a maximum of $40.0million, selecting a variable rate of interest for up to 90 days or a fixedrate for a maximum of 30 days.  Therewere no borrowings outstanding under the CMA as of September 30, 2009.

 

**NOTE 6****—****SECURITIES**

 

Securities with an amortizedcost of $157.6 million at September 30, 2009, (fair value of $159.5million at September 30, 2009), 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 (or loss) if the portfolio had beenliquidated on that date.  Security gains(or losses) are realized only in the event of dispositions prior to maturity.

 

A summary of the amortized cost and estimated fair value ofsecurities is presented below:

 
| ** **                        | ** ** | **Amortized** | ** **        | **Gross Unrealized** | ** ** | **Fair**   | ** ** |
|-----------------------------------|------------|---------------|-------------------|----------------------|------------|------------|------------|
| ** **                        | ** ** | **Cost**      | ** **        | **Gains**            | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **September 30, 2009**       |       |          |              |                 |       |       |       |   |   |
| Available-for-sale securities     |       |          |              |                 |       |       |       |   |   |
| U.S. Government agencies          | ** ** | **$**         | **85,404**        | ** **           | **$**      | **99**     | ** ** | **$** | **706** | ** ** | **$** | **84,797** | ** ** |
| Mortgage backed securities        | ** ** | **55,661**    | ** **        | **553**              | ** ** | **126**    | ** ** | **56,088** | ** ** |
| States and political subdivisions | ** ** | **45,554**    | ** **        | **1,947**            | ** ** | **—** | ** ** | **47,501** | ** ** |
| Other securities                  | ** ** | **15,379**    | ** **        | **477**              | ** ** | **1**      | ** ** | **15,855** | ** ** |
| ** **                        | ** ** | **$**         | ** 201,998** | ** **           | **$**      | **3,076**  | ** ** | **$** | **833** | ** ** | **$** | **204,241** | ** ** |
| ** **                        | ** ** | ** **    | ** **        | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Held-to-maturity securities       | ** ** | ** **    | ** **        | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government agencies          | ** ** | **$**         | **3,027**         | ** **           | **$**      | **35**     | ** ** | **$** | **—** | ** ** | **$** | **3,062** | ** ** |
| States and political subdivisions | ** ** | **46,876**    | ** **        | **1,935**            | ** ** | **16**     | ** ** | **48,795** | ** ** |
| ** **                        | ** ** | **$**         | ** 49,903**  | ** **           | **$**      | **1,970**  | ** ** | **$** | **16** | ** ** | **$** | **51,857** | ** ** |

 

At September 30, 2009, the Bank did not hold investment securitiesof any single issuer, other than obligations of the U.S. Treasury and otherU.S. government agencies, whose aggregate book value exceeded 10% of shareholders’equity.

 

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Proceeds from the maturity, call or sale of available-for-salesecurities were $162.8 million during the nine months ended September 30,2009.  Proceeds from the maturity or callof held-to-maturity securities were $9.0 million during the nine months ended September 30,2009.

 

The fair values of allsecurities at September 30, 2009 either equaled or exceeded the cost ofthose securities, or the decline in fair value is considered temporary.  The information in the table below classifiesthe investments with unrealized losses at September 30, 2009 according tothe 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 abilityand intent to hold the securities classified as held-to-maturity until theymature.  Furthermore, as of September 30,2009, management also had the ability to hold the securities classified asavailable for sale for a period of time sufficient for a recovery of cost.  The unrealized losses are largely as a resultof increases in market interest rates over the yield available at the time theunderlying securities were purchased. The fair value is expected to recover as the bonds approach theirmaturity date or repricing date or if market yields for such investmentsdecline.  Management does not believe anyof the securities are impaired because of reasons of credit quality.  Accordingly, as of September 30, 2009,management believes the impairments detailed in the table below are temporaryand no impairment loss has been realized in the Corporation’s consolidatedincome statement.

 

The following table presents the Bank’s investments withunrealized losses at September 30, 2009 according to the term of theunrealized loss:

 
| ** **                             | ** ** | **Less than  12 months** | ** **       | **12 months  or Greater** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|--------------------------|------------------|---------------------------|------------|------------|------------|
| ** **                             | ** ** | **Fair**                 | ** **       | **Unrealized**            | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **September 30,  2009**           | ** ** | **Value**                | ** **       | **Losses**                | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| **Type of Security**                   | ** ** | ** **               | ** **       | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **U.S.  Government agencies**          | ** ** | **$**                    | **61,326**       | ** **                | **$**      | **832**    | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **61,326** | ** ** | **$** | **832** | ** ** |
| **States and  political subdivisions** | ** ** | **412**                  | ** **       | **3**                     | ** ** | **436**    | ** ** | **14** | ** ** | **848** | ** ** | **17** | ** ** |
| ** **                             | ** ** | **$**                    | ** 61,738** | ** **                | **$**      | **835**    | ** ** | **$** | **436** | ** ** | **$** | **14** | ** ** | **$** | **62,174** | ** ** | **$** | **849** | ** ** |

 

At September 30, 2009,one of 206 state and political subdivision securities had recorded unrealizedlosses for a period longer than 12 months. Because these securities, along with the corporate securities, declinedin value when interest rates began to rise, and not because of the creditquality of the issuer, and because management had both the intent and abilityto hold the investments, the securities were not consideredother-than-temporarily impaired.

 

The table below shows theamortized cost and fair value of investment securities at September 30,2009 by contractual or legal maturity. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations.  Mortgage-backed securities and equitysecurities are shown separately since they are not due at a single maturitydate.

** **
| ** **                              | ** ** | **Held to  Maturity** | ** ** | **Available  for Sale** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Amortized**         | ** ** | **Estimated**           | ** ** | **Amortized** | ** ** | **Estimated** | ** ** |
| **September 30,  2009**            | ** ** | **Cost**              | ** ** | **Fair Value**          | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
|                                    |       |                  |       |                    |       |   |   |   |   |
| Due in one year or less                 |       | $                     | 7,082      |                    | $          | 7,164 |   | $ | 1,270 |   | 1,296 |   |
| Due after one year through  five years  |       | 9,892                 |       | 10,210                  |       | 33,389 |   | 34,006 |   |
| Due after five years  through ten years |       | 11,843                |       | 12,377                  |       | 70,026 |   | 69,486 |   |
| Due after ten years                     |       | 21,086                |       | 22,106                  |       | 37,755 |   | 39,467 |   |
| Mortgage-backed securities              |       | —                |       | —                  |       | 55,661 |   | 56,089 |   |
| Equity Securities                       |       | —                |       | —                  |       | 3,897 |   | 3,897 |   |
| **Total**                               | ** ** | **$**                 | **49,903** | ** **              | **$**      | **51,857** | ** ** | **$** | **201,998** | ** ** | **$** | **204,241** | ** ** |
|                                         |            |                       |            |                         |            |  |  |  |  |  |  |  |  |

 

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**NOTE 7****—****RECENT ACCOUNTING PRONOUNCEMENTS**

 

Asdiscussed in Note 3 — Accounting Standards Codification, on July 1, 2009,the ASC became FASB’s officially recognized source of authoritative GAAPapplicable to all public and non-public non-governmental entities, supersedingexisting FASB, AICPA, EITF and related literature. Rules and interpretivereleases of the SEC under the authority of federal securities laws are alsosources of authoritative GAAP for SEC registrants. All other accountingliterature is considered non-authoritative. The switch to the ASC affects theaway companies refer to U.S. GAAP in financial statements and accountingpolicies. Citing particular content in the ASC involves specifying the uniquenumeric path to the content through the Topic, Subtopic, Section andParagraph structure.

 

FASBASC Topic 320, “Investments - Debt and Equity Securities.” New authoritative accountingguidance under ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changesexisting guidance for determining whether an impairment is other than temporaryto debt securities and (ii) replaces the existing requirement that theentity’s management assert it has both the intent and ability to hold animpaired security until recovery with a requirement that management assert: (a) itdoes not have the intent to sell the security; and (b) it is more likelythan not that it will not have to sell the security before recovery of its costbasis.  Under ASC Topic 320, declines in thefair value of held-to-maturity and available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings as realizedlosses to the extent the impairment is related to credit losses. The amount ofthe impairment related to other factors is recognized in other comprehensiveincome. The Corporation adopted the provisions of the new authoritativeaccounting guidance under ASC Topic 320 during the third quarter of 2009.Adoption of the new guidance did not significantly impact the Corporation’sfinancial statements.

 

FASBASC Topic 715, “Compensation - Retirement Benefits.” New authoritativeaccounting guidance under ASC Topic 715, “Compensation — Retirement Benefits,”provides guidance related to an employer’s disclosures about plan assets ofdefined benefit pension or other post-retirement benefit plans. Under ASC Topic715, disclosures should provide users of financial statements with anunderstanding of how investment allocation decisions are made, the factors thatare pertinent to an understanding of investment policies and strategies, themajor categories of plan assets, the inputs and valuation techniques used tomeasure the fair value of plan assets, the effect of fair value measurementsusing significant unobservable inputs on changes in plan assets for the periodand significant concentrations of risk within plan assets. The disclosures requiredby ASC Topic 715 will be included in the Corporation’s financial statementsbeginning with the financial statements for the year ending December 31,2009.

 

FASBASC Topic 805, “Business Combinations.” On January 1, 2009, newauthoritative accounting guidance under ASC Topic 805, “Business Combinations,”became applicable to the Corporation’s accounting for business combinationsclosing on or after January 1, 2009. ASC Topic 805 applies to alltransactions and other events in which one entity obtains control over one ormore other businesses. ASC Topic 805 requires an acquirer, upon initiallyobtaining control of another entity, to recognize the assets, liabilities andany non-controlling interest in the acquiree at fair value as of the acquisitiondate. Contingent consideration is required to be recognized and measured atfair value on the date of acquisition rather than at a later date when theamount of that consideration may be determinable beyond a reasonable doubt.This fair value approach replaces the cost-allocation process required underprevious accounting guidance whereby the cost of an acquisition was allocatedto the individual assets acquired and liabilities assumed based on theirestimated fair value. ASC Topic 805 requires acquirers to expenseacquisition-related costs as incurred rather than allocating such costs to theassets acquired and liabilities assumed, as was previously the case under prioraccounting guidance. Assets acquired and liabilities assumed in a businesscombination that arise from contingencies are to be recognized at fair value iffair value can be reasonably estimated. If fair value of such an asset orliability cannot be reasonably estimated, the asset or liability wouldgenerally be recognized in accordance with ASC Topic 450, “Contingencies.”Under ASC Topic 805, the requirements of ASC Topic 420, “Exit or Disposal CostObligations,” would have to be met in order to accrue for a restructuring planin purchase accounting. Pre-acquisition contingencies are to be recognized atfair value, unless it is a non-contractual contingency that is not likely tomaterialize, in which case, nothing should be recognized in purchase accountingand, instead, that contingency would be subject to the probable and estimablerecognition criteria of ASC Topic 450, “Contingencies.”

 

FASBASC Topic 810, “Consolidation.” New authoritative accounting guidance under ASCTopic 810, “Consolidation,” amended prior guidance to establish accounting andreporting standards for the non-controlling interest 

 

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in a subsidiaryand for the deconsolidation of a subsidiary. Under ASC Topic 810, anon-controlling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as a component of equity in the consolidated financialstatements. Among other requirements, ASC Topic 810 requires consolidated netincome to be reported at amounts that include the amounts attributable to boththe parent and the non-controlling interest. It also requires disclosure on the face of the consolidated incomestatement, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. The new authoritative accounting guidanceunder ASC Topic 810 became effective for the Corporation on January 1,2009 and did not have a significant impact on the Corporation’s financialstatements. Further new authoritative accounting guidance under ASC Topic 810amends prior guidance to change how a company determines when an entity that isinsufficiently capitalized or is not controlled through voting (or similarrights) should be consolidated. The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance. Thenew authoritative accounting guidance requires additional disclosures about thereporting entity’s involvement with variable-interest entities and anysignificant changes in risk exposure due to that involvement as well as itsaffect on the entity’s financial statements. The new authoritative accountingguidance under ASC Topic 810 will be effective January 1, 2010 and is notexpected to have a significant impact on the Corporation’s financial statements.

 

FASBASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritativeaccounting guidance under ASC Topic 820,”Fair Value Measurements andDisclosures,” affirms that the objective of fair value when the market for anasset is not active is the price that would be received to sell the asset in anorderly transaction, and clarifies and includes additional factors fordetermining whether there has been a significant decrease in market activityfor an asset when the market for that asset is not active. ASC Topic 820requires an entity to base its conclusion about whether a transaction was notorderly on the weight of the evidence. The new accounting guidance amendedprior guidance to expand certain disclosure requirements. The Corporationadopted the new authoritative accounting guidance under ASC Topic 820 duringthe first quarter of 2009. Adoption of the new guidance did not significantlyimpact the Corporation’s financial statements. Further new authoritative accounting guidance (Accounting StandardsUpdate No. 2009-5) under ASC Topic 820 provides guidance for measuring thefair value of a liability in circumstances in which a quoted price in an activemarket for the identical liability is not available. In such instances, areporting entity is required to measure fair value utilizing a valuationtechnique that uses (i) the quoted price of the identical liability whentraded as an asset, (ii) quoted prices for similar liabilities or similarliabilities when traded as assets, or (iii) another valuation techniquethat is consistent with the existing principles of ASC Topic 820, such as anincome approach or market approach. The new authoritative accounting guidancealso clarifies that when estimating the fair value of a liability, a reportingentity is not required to include a separate input or adjustment to otherinputs relating to the existence of a restriction that prevents the transfer ofthe liability. The forgoing new authoritative accounting guidance under ASCTopic 820 will be effective for the Corporation’s financial statementsbeginning October 1, 2009 and is not expected to have a significant impacton the Corporation’s financial statements.

 

FASBASC Topic 825 “Financial Instruments.” New authoritative accounting guidanceunder ASC Topic 825,”Financial Instruments,” requires an entity to providedisclosures about the fair value of financial instruments in interim financialinformation and amends prior guidance to require those disclosures insummarized financial information at interim reporting periods.

 

FASBASC Topic 855, “Subsequent Events.” New authoritative accounting guidance underASC Topic 855, “Subsequent Events,” establishes general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.

 

FASBASC Topic 855 defines (i) the period after the balance sheet date duringwhich a reporting entity’s management should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements, (ii) the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements, and (iii) the disclosures an entity should make about eventsor transactions that occurred after the balance sheet date. The newauthoritative accounting guidance under ASC Topic 855 became effective for theCorporation’s financial statements for periods ending after June 15, 2009and did not have a significant impact on the Corporation’s financial statements.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

**FORWARD-LOOKING STATEMENTS**

 

Certain statements contained in this report may notbe based on historical facts and are “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Theseforward-looking statements may be identified by, among other things, the use offorward-looking terminology such as “could,” “would,” “expects,” “believes,”“may” or “will,” or future or conditional verb tenses, and variations or  negatives of such terms.  These forward-looking statements include,without limitation, those relating to the Corporation’s valuationmethodologies, the effect of recent accounting pronouncements, loan portfolioconcentrations, repayment of loans by borrowers, satisfaction of capitaladequacy requirements, the repayment of FHLB borrowings, adequacy of capitalresources and traditional sources of cash generated from operating activitiesto meet liquidity 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, changes in economic conditions; fluctuations in prevailing interest ratesand the effectiveness of our risk monitoring systems; the ability of ourborrowers to repay loans; adverse changes in our special mention credits; ourability to meet regulatory capital adequacy requirements; our ability to meet liquidityneeds from operating activities; the accuracy of assumptions in our rate riskanalysis; our ability to recognize deferred tax assets; our ability to maintaincredit quality; laws and regulations affecting financial institutions ingeneral; our ability to control factors influencing net interest income; thegeographic concentration of our assets; our ability to maintain sufficientasset quality and cost controls; and other factors generally understood toaffect the financial results of financial services companies and other factorsdetailed from time to time in our filings with the SEC. We undertake noobligation to update these forward-looking statements to reflect events orcircumstances that occur after the date of this report.

 

**EXECUTIVEOVERVIEW**

 

AtSeptember 30,2009, the consolidated total assets of the First Farmers and MerchantsCorporation (the “Corporation”) were $931.5 million, its consolidated net loanswere $580.0 million, its total deposits were $768.6 million and its totalshareholders’ equity was $107.3 million. The Corporation’s loan portfolio at September 30, 2009 reflected a decrease of$6.9 million, or 1.2%, compared to December 31, 2008.  Total deposits increased $23.7 million, or3.2%,  and shareholders’ equity decreasedby less than 0.1% during the first nine months of 2009.  Total shareholders’ equity includes anunrealized gain on available-for-sale securities of approximately $1.4 million.

 

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**FINANCIAL CONDITION**

 

Averageearning assets at September 30,2009 were up 7.1%, or $55.1 million, from average earning assets at December 31,2008.  Average overnight investments at September 30, 2009 were up $6.1million compared to December 31, 2008. Average investment securities at September 30, 2009 were down less than 1%compared to December 31, 2008, although total investment securities at September 30,2009 were up $20.2 million compared to December 31, 2008.  Average total assets of $918.0 million at September 30, 2009 increased 7.3%or $62.7 million, compared to $855.3 million at December 31, 2008.

 

**Securities**

 

Available-for-salesecurities are an integral part of the asset/liability management process forFirst Farmers and Merchants Bank, the Corporation’s sole direct subsidiary (the“Bank”).  Accordingly, they represent animportant source of liquidity available to fund loans and accommodate assetreallocation strategies dictated by changes in the Bank’s operating and taxplans, shifting yield spread relationships and changes in configuration of theyield curve.  At September 30, 2009, the Bank’sinvestment securities portfolio had $204.2 million available-for-salesecurities, which are valued at fair market value, and $49.9 millionheld-to-maturity securities, which are valued at cost on the balance sheet.These compare to $174.5 million of available-for-sale securities and $59.4million of held-to-maturity securities as of December 31, 2008.

 

**Loans**

 

Theloan portfolio is the largest component of earning assets for the Bank and, consequently, provides the highestamount of revenues for the Corporation. The loan portfolio also contains the highestexposure to risk as a result of the possibility of unexpected deterioration inthe credit quality of borrowers.  Whenanalyzing potential loans, management of the Bank assesses both interest rateobjectives and credit quality objectives in determining whether to make a givenloan and the appropriate pricing for that loan. All loans are expected to be repaid from cash flow or proceeds from thesale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on creditevaluation of the borrowers.

 

Theloan portfolio experienced some contraction during the third quarter, movingback into negative territory for the year. Loan growth has been sluggish in 2009, as both the commercial and retailportfolios have experienced some deterioration in the first nine months of theyear.  The Bank continues to carry aconcentration in 1-4 family residential first mortgage lending, but thisportfolio has been flat in the first nine months of the year.  On the commercial side, the Bank hasexperienced growth in the non-farm, non-residential real estate portfolio.  Over half of the Bank’s exposure is in theowner-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 andmulti-family real estate.

 

Realestate loans represented 78.6% of total loans at September 30, 2009compared to 78.7% at September 30, 2008 and 76.6% at December 31, 2008.  Management of the Bank believes the risk ofthis concentration is acceptable given the quality of underwriting and the lowlevel of historical loss experience.  TheBank’s construction and development portfolio has decreased by $15.8 million inthe last nine months, as existing construction projects have been completed andfew new projects have been brought online to replace them.  Construction and development loansrepresented only 5.0% of total loans as of September 30, 2009, compared to7.5% at September 30, 2008 and 8.8% at December 31, 2008. However,the Bank continues to reserve more heavily against its construction anddevelopment portfolio than any other segment of the commercial portfolio, giventhe comparatively high level of losses that have been incurred within thissegment of the portfolio over the previous year.

 

Theanalysis 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 more completely quarterly inconjunction with loan review reports and evaluations that are discussed inmeetings with loan officers, credit administration and the Bank’s Board ofDirectors.  No reserve is placed againstloans that are risk 

 

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rated “1”, as these loansare all cash-secured.  A separatemethodology is used for the criticized and classified portfolios (risk ratings6-8), thus the Bank’s historical loss methodology is utilized for thepass-grade ratings (risk ratings 2-5) of the commercial portfolio.  The only areas of the commercial portfolio inwhich significant losses have been incurred over the past year are theconstruction and development and non-farm, non-residential real estateportfolios, with four-quarter gross loss rates of 3.1% and 1.0%.  Other large segments of the commercialportfolio have seen little to no charge-off activity during the past year.   The Bank’s gross loss rate for theconstruction and development portfolio decreased slightly in the third quarter,falling from 3.9% to 3.1%.  The level ofreserves against the pass grade construction and development portfoliodecreased by 2.9%.  The loss rate in thenon-farm, non-residential portfolio remained unchanged in the third quarter at1.0% .  The methodology used to reservefor the Bank’s non-farm, non-residential portfolio was modified in the secondquarter.  Previously, the onlydifferentiation made within the non-farm, non-residential portfolio was thatthe loans were segmented by risk rating. Beginning in the second quarter, theportfolio is also being divided by property types such as owner-occupied and“true” commercial real estate components. Commercial real estate is further stratified by property type (e.g.,office, retail, industrial/warehouse, residential, self-storage, etc).  Property types which are deemed to behigher-risk forms of lending and present the highest likelihood of creditlosses now carry correspondingly higher reserves.   The allowance for possible loan and leaselosses was $8.5 million, or 1.5% of gross loans and leases, at September 30, 2009, compared to$8.6 million, or 1.4%, at December 31, 2008.  Net charge-offs through September 30, 2009 were $1.9million, which results in an annualized net charge-off ratio of 0.4%.

 

Aformal process is in place to enhance control over the underwriting of loansand to monitor loan collectability.  Thisprocess includes education and training of personnel about the Bank’s loanpolicies and procedures, credit analysts to support lenders, timelyidentification of loans with adverse characteristics, control of correctiveactions and objective monitoring of loan reviews.  The Special Assets Department of the Bankidentifies and monitors assets that need attention.  At September 30, 2009, this process identifiedloans totaling $9.2 million, or 1.6% of the portfolio, that were classified asother assets especially mentioned, compared to loans totaling $9.9 million, or1.7% of the portfolio, so classified at December 31, 2008.  Loans totaling $29.0 million, or 4.9% of theportfolio, were classified as substandard at September 30, 2009, compared to loans totaling$26.1 million, or 4.4% of the portfolio, so classified at December 31,2008.  No loans were classified asdoubtful at September 30,2009 and December 31, 2008.

 

**Deposits**

 

The Bank does not have any foreign offices and all deposits areserviced in its 19 domestic offices.  TheBank’s average deposits increased 7.8% during the first nine months of 2009compared to an increase of 2.8% in the first nine months of 2008.  The increase resulted from the Bank offeringmore competitive rates on money market accounts.  Average total noninterest-bearing depositswere 15.6% of total deposits at September 30, 2009, contributing to the Bank’slow cost of deposits, compared to 17.1% at December 31, 2008.

 

**Regulatory Requirements for Capital**

 

TheCorporation and the Bank are subject to federal regulatory risk-adjustedcapital adequacy standards.  Failure tomeet capital adequacy requirements could result in certain mandatory, andpossibly additional discretionary, actions by regulators that could have adirect material adverse effect on the financial condition of the Corporationand the Bank.  The regulations requirethe Corporation and the Bank to meet specific capital adequacy guidelines thatinvolve quantitative measures of assets, liabilities and certainoff-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.

 

Quantitative measures established by the Board of Governors of theFederal Reserve System to ensure capital adequacy require the Corporation andthe Bank to maintain minimum amounts and ratios of Tier 1 Capital and TotalCapital (Tier 1 plus Tier 2 Capital) to risk-weighted assets and of Tier 1Capital to average total assets (leverage capital ratio).   Equity capital (net of certain adjustmentsfor intangible assets and investments in non-consolidated subsidiaries andcertain classes of preferred stock) is considered Tier 1 Capital.  Tier 2 Capital consists of core capital plussubordinated debt, some types of preferred stock, and a defined percentage ofthe allowance for possible loan and lease****losses.  To be “well-capitalized” under federal bankregulations, a bank holding company must have a Tier 1 Capital ratio of atleast 6%, a Total Capital ratio of at least 10%, and a leverage capital ratioof at least 5%.  At September 30, 2009, the

 

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Corporation’sTier 1, Total Capital and leverage capital ratios were 15.1%, 16.3% and 10.6%,respectively.  The ratios were 15.3%,16.5% and 10.9%, respectively, at December 31, 2008.  As of September 30, 2009, the Bank’s Tier 1 Capital,Total Capital and leverage capital were 14.8%, 16.0%, and 10.3%, respectively,compared to 15.0%, 16.2%, and 10.6% at December 31, 2008. Managementbelieves, as of September 30,2009, that the Corporation and the Bank each met all capital adequacyrequirements to which they are subject.

 

**LIQUIDITY AND CAPITAL****RESOURCES**

 

Most of the capital needs of the Bank historically have been financedwith retained earnings and deposits received, and the Corporation’s primarysource of liquidity has been dividends declared by the Bank.  In March 2008, the Bank obtained fiveadvances at $7 million each from the FHLB. The first scheduled repayment of the advances was made in March 2009.  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 to Tennessee statutes and regulations that imposerestrictions on the amount of dividends that may be declared.  Furthermore, any dividend payments aresubject to the continuing ability of the Bank to maintain its compliance withminimum federal regulatory capital requirements and to retain itscharacterization under federal regulations as a “well-capitalized” institution.The Bank declared a $0.365 per share dividend in the second quarter of 2009,which was paid in the third quarter of 2009. Management believes that the Corporation’s traditional sources of cashgenerated from the Bank’s operating activities are adequate to meet theCorporation’s liquidity needs for normal ongoing operations.  The Bank’s Board of Directors has adopted aliquidity policy that outlines specific liquidity target balances.  Compliance with this policy is reviewedquarterly by the Bank’s Asset/Liability Committee and results are reported tothe Bank’s Board of Directors.

 

TheBank’s formal asset and liability management process is used to controlinterest rate risk and assist management in maintaining reasonable stability inthe gross interest margin as a result of changes in the level of interest ratesand/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 rate sensitivity),which is the principal factor in determining the effect that fluctuatinginterest 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.

 

**CRITICALACCOUNTING POLICIES**

 

Theaccounting principles the Bank follows and the methods of applying theseprinciples conform with accounting principles generally accepted in the UnitedStates 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, in thecase of the determination of the allowance for loan and lease losses (“ALLL”)and the recognition of deferred income tax assets, have been critical to thedetermination of the Corporation’s financial position, results of operationsand cash flows.  As of September 30,2009, the deferred income tax asset was $5.0 million, compared to $4.9 millionat December 31, 2008 and was included with other assets on the balancesheet.

 

*Allowance for Loan and Lease Losses*

 

TheBank’s management assesses the adequacy of the ALLL prior to the end of eachmonth and prepares a more formal review quarterly to assess the risk in theBank’s loan portfolio.  This assessmentincludes procedures to estimate the allowance and test the adequacy andappropriateness of the resulting balance. The ALLL represents calculated amounts for specifically identifiedcredit exposure and exposures readily predictable by historical or comparativeexperience.  Even though this calculationconsiders specific credits, the entire allowance is available to absorb anycredit losses.

 

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Thesecalculated amounts are determined by assessing loans identified as not incompliance with loan agreements.  Theseloans are generally in two different risk groups.  One group is unique loans (commercial loans,including those loans considered impaired). The second group is pools of homogenous loans (generally retail andmortgage loans).  The calculation forunique loans is based primarily on risk rating grades assigned to each of theseloans as a result of the 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.

 

Criteriaconsidered and processes utilized in evaluating the adequacy of the ALLL are:

·                  Portfolio quality trends;

·                  Changes in the nature and volume of theportfolio;

·                  Present and prospective economic and businessconditions, locally and nationally;

·                  Management review systems and boardoversight, including external loan review processes;

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

·                  Changes in personnel, management and staff;and

·                  Existence and effect of any concentrations ofcredit.

 

Inassessing the adequacy of the ALLL, the risk characteristics of the entire loanportfolio are evaluated.  This processincludes the judgment of the Bank’s management, input from independent loanreviews and reviews that may have been conducted by bank regulators as part oftheir usual examination process.

 

*Deferred Income Tax Assets*

 

Deferredincome tax assets consist mainly of the tax effect of excess provisions forloan and lease****losses over actual lossesincurred and deferred compensation. Management believes that it is more likely than not that these assetswill be realized in future years.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

TheBank is a party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit and stand-by letters of credit.  Those 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 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.

 

Thetotal outstanding loan commitments and stand-by letters of credit in the normalcourse of business at September 30,2009 were $110.3 million and $8.9 million, respectively, compared to $110.9million and $11.1 million, respectively, at September 30, 2008.

 

AtSeptember 30,2009, the Corporation and the Bank did not have any off-balance sheetarrangements other than commitments to extend credit and stand-by letters ofcredit.

 

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**RESULTS OF OPERATIONS**

 

Totalinterest income for the first nine months of 2009 was $30.5 million compared to$32.9 million for the first nine months of 2008 and $10.2 million for the threemonths ended September 30, 2009 compared to $10.9 million for the threemonths ended September 30, 2008. Interest and fees earned on loans and investments are the components oftotal interest income.  Interest and feesearned on loans were $23.8 million, a decrease of approximately $881,000, or3.6%, during the first nine months of 2009 compared to the first nine months of2008, and $8.0 million for the three months ended September 30, 2009, adecrease of approximately $180,000, or 2.2%, compared to the three months endedSeptember 30, 2008.  Nominalinterest earned on investment securities and other investments was $6.7million, a decrease of $1.3 million, or 16.5%, during the first nine months of2009 compared to the first nine months of 2008, and $2.2 million for the threemonths ended September 30, 2009, a decrease****ofapproximately $426,000, or 16.3%, compared to the three months ended September 30,2008.

 

Totalinterest expense in the first nine months of 2009 was $7.1 million, a decreaseof $2.5 million, or 25.8%, compared to the first nine months of 2008, and $2.1million for the three months ended September 30, 2009, a****decrease of approximately $880,000 compared to the three monthsended September 30, 2008.  The lowerinterest rates for certificates of deposits and public funds during the thirdquarter of 2009 were the primary reason for the lower expense.  As a policy, budgeted financial goals aremonitored on a quarterly basis by the Bank’s Asset/Liability Committee, whichreviews the actual dollar change in net interest income for different interestrate movements.  A negative dollar changein net interest income for a 12-month and 24-month period of less than 10.0% ofnet interest income given a 100 to 200 basis point shift in interest rates isconsidered an acceptable rate risk position. The rate risk analysis for the 12-month period beginning October 1,2009 and ending September 30, 2010 showed a worst-case potential change tonet interest income of 2.4%, or an increase in net interest income ofapproximately $793,000 by the end of the period.

 

Netinterest income of the Corporation on a fully taxable equivalent basis isinfluenced primarily by changes in:

(1)           the volume and mix of earning assetsand sources of funding;

(2)           market rates of interest; and

(3)           income tax rates.

 

Theimpact of some of these factors can be controlled by management policies andactions.  External factors also can havea significant impact on changes in net interest income from one period toanother.  Some examples of such factorsare:

(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.

 

Thenet interest margin, on a tax equivalent basis, at September 30, 2009, September 30, 2008 and December,31, 2008 was 4.06%, 4.36% and 4.40%, respectively.

 

Additionsof $405,000 were made to the provision for possible loan and lease losses inthe third quarter of 2009 as a result of an increase in the level of creditlosses on both secured and unsecured consumer loans as well as the Bank havingto downgrade the credit level on a few commercial loans.

 

Noninterest income was$10.3 million, an increase of approximately $116,000, or 1.1%, during the firstnine months of 2009 compared to the first nine months of 2008, and $2.7million for the three months ended September 30, 2009, a decrease ofapproximately $651,000 compared to the three months ended September 30,2008.  The gains on sales of available-for-salesecurities, representing $2.5 million in income, was the primary reason for theincrease in the first nine months of 2009.

 

Noninterestexpenses, excluding the provision for possible loan and lease losses was $24.8million, an increase of $1.1 million, or 4.6%, in the first nine months of 2009as compared to the first nine months of 2008. ** **The Bank expensed $1 million for the Federal Deposit Insurance Company (“FDIC”) specialassessment and also the increase in the FDIC’s regular assessment for the firstnine months of 2009.

 

The Corporation does not have any long-term debt or other long-termobligations; however, in 2008, the Bank received a $41.2 million advance fromFHLB.   The scheduled $7.0 million annual principal maturities ofborrowings

 

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under this credit linebegan in March 2009 and will end in 2013. Please refer to Note 5 in the notes to consolidated financial statementsincluded in this report for additional information about borrowings fromthe FHLB.

 

TheBank also leases certain of its properties. There was no change during the nine-month period ended September 30, 2009 in the termsof these leases.

 

Netincome for the nine months ended September 30, 2009 was $6.1 million, comparedto $8.1 million for the nine months ended September 30, 2008.  A decrease in interest income on loans andsecurities contributed to the period-over-period decrease.  The Corporation earned $1.10 per share in thethird quarter of 2009 and $1.43 per share in the third quarter of 2008.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

Duringthe nine months ended September 30,2009, there were no material changes in the quantitative and qualitativedisclosures about market risk presented in the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Item 4.  Controls and Procedures.**

 

(a) Evaluation of Disclosure Controlsand Procedures.  The Corporation,with the participation of its management, including the Corporation’s ChiefExecutive Officer and Assistant Treasurer (principal financial officer), carriedout an evaluation of the effectiveness of the design and operation of itsdisclosure controls and procedures (as defined in Rules 13a-15 and 15d-15under the Exchange Act) as of the end of the period covered by thisreport.  Based upon that evaluation andas of the end of the period covered by this report, the Corporation’s ChiefExecutive Officer and Assistant Treasurer (principal financial officer)concluded that the Corporation’s disclosure controls and procedures wereeffective in ensuring that information required to be disclosed in its reportsthat the Corporation files or submits to the SEC under the Exchange Act isrecorded, processed, summarized and reported on a timely basis.

 

(b) Changes inInternal Control Over Financial Reporting. There has been no change in the Corporation’s internal control overfinancial reporting that occurred during the third quarter of 2009 that hasmaterially affected, or is reasonably likely to materially affect, theCorporation’s internal control over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**Item 1A. Risk Factors.**

 

There have been no material changes in the risk factors previouslydisclosed in the Corporation’s Annual Report on Form 10-K for the yearended December 31, 2008.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

The following table provides information regarding purchases of the Corporation’scommon stock made by the Corporation during the third quarter of 2009:

 

**CORPORATION’S PURCHASES OF EQUITY SECURITIES**

 
| **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** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| July 1, 2009 — July 30, 2009           |       | —                                  |       | —                             |       | —                                                                                        |       | —                                                                                                                     |       |
| August 1, 2009 - August 31, 2009            |       | —                                  |       | —                             |       | —                                                                                        |       | —                                                                                                                     |       |
| September 1, 2009 — September 30, 2009 |       | 23,007                                  | *          | $                                  | 50.00      |                                                                                          | —     |                                                                                                                       | —     |   |
| Total                                                 |       | 23,007                                  |       | $                                  | 50.00      |                                                                                          | —     |                                                                                                                       | —     |   |

 

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*Purchased from a third-party seller pursuant to a previouslynegotiated agreement to purchase.

 

**Item 6.  Exhibits.**

 
| **EXHIBIT** | ** ** | ** **                                                                                                                                                                                                                                                                        |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                              |
| 3.1         |       | Charter. (1)                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                              |
| 3.2         |       | Articles of Amendment to  Charter. (1)                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                              |
| 3.3         |       | 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 April 23, 2007 (File Number000-10972).

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

FIRST FARMERS ANDMERCHANTS CORPORATION

(Registrant)

 

 
| Date   | November 6, 2009                                                                                     |   | /s/ T. Randy Stevens    |
|--------|-----------------------------------------------------------------------------------------------------------|--------|-------------------------|
|   | T. Randy Stevens, Chief Executive Officer                                                                 |
|   |                                                                                                      |
|   |                                                                                                      |
| Date   | November 6, 2009                                                                                     |   | /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         |       | 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 April 23, 2007 (File Number000-10972).

 

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