Annual Report (Form 10-K), fiscal year 1994

Item 1. Business.
A discussion of the general development of the business is included in Note 1 of the Notes to Consolidated Financial Statements which is a part of the Annual Report to Stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Employees
FFMC has no employees. Its subsidiary, the Bank had approximately one hundred ninety-four (194) full time employees and fifty-eight (58) part time employees. Seven of the Bank's officers also were officers of FFMC. Employee benefit programs provided by the Bank include a deferred profit sharing plan, an annual profit sharing plan, a salary continuation plan, a deferred compensation plan, training programs, group life and health insurance and paid vacations.
Item 2.



Item 2. Properties.
A discussion of the properties owned by the company is included in Note 1 of the Notes to Consolidated Financial Statements which is a part of then Annual Report to Stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Item 3.

Item 3. Legal Proceedings.
There are no material pending legal proceedings known to the Board of Directors in which any director or executive officer or principal shareholder of the Corporation and its subsidiary or any business in which such persons are participants as a material interest adverse to the Corporation and its subsidiary.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the security holders during the fourth quarter of the fiscal year ended December 31, 1994.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.
A discussion of the registrant's common stock and related security holder matters is included in the Management's Discussion and Analysis of Financial Conditions and Results of Operation which is part of the Annual Report to Stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Item 6.

Item 6. Selected Financial Data.
The selected financial data is included in the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Conditions and Results of Operation which is part of the Annual Report to Stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's discussion and analysis of financial conditions and results of operations is included in Management's Discussion and Analysis of Financial Condition and Results of Operations which is part of Annual Report to Stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Item 8.


Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data are included in Consolidated Financial Statements and Management's Discussion and Analysis of Financial Conditions and Results of Operation which are part of the Annual Report to stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993, and 1992
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
		First Farmers and Merchants Corporation (the Corporation) was incorporated on March 31, 1982, as a Tennessee corporation. On April 13, 1982, the Board of Directors of the Corporation adopted a resolution to execute and deliver to the Board of Governors of the Federal Reserve System an application pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, for prior approval by the Board of action to be taken by the Corporation which would result in its becoming a bank holding company.
		As of December 31, 1994, the only subsidiary of the corporation was the Bank. The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909. The Bank conducts a full-service commercial banking business at its principal office at 816 South Garden Street, Columbia, Tennessee and at thirteen (13) branches: High Street Branch, Northside Branch, Shady Brook Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg; Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and Centerville Branch in Centerville. The Bank serves Saturn Distribution Corporation at its fifteenth location in the Northfield Complex at the Saturn location near Spring Hill.
		The community service area of the Bank is comprised of Maury, Lawrence, Marshall, Hickman, and adjacent counties. Commercial banking in the marketing area served by the Bank is highly competitive. Although the Bank is ranked as the largest bank in the area, in terms of total deposits, the Bank faces substantial competition from ten (10) other banks and three (3) savings and loan associations located in the marketing area.
Accounting Policies
		The accounting principles followed and the methods of applying those principles conform with generally accepted accounting principles and to general practices in the banking industry. The significant policies are summarized as follows.
Principles of Consolidation
		The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, the Bank. Material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Due From Banks
		Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the Federal Reserve Bank and other banks. Average reserve requirements for the year ended December 31, 1994, amounted to approximately $9,579,000.
Cash Equivalents
		Cash equivalents include cash on hand, cash due from banks, and federal funds sold. Federal funds are sold for one-day periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
		Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of the adoption was an increase in stockholders' equity of $257,108 (net of $171,405 in deferred income taxes) to reflect the net unrealized gains on securities classified as available-for-sale that were previously classified as held-to-maturity. SFAS 115 establishes standards of accounting and reporting for investments in equity securities that have readily determinable fair values and all debt securities. Under the Statement, all such investments are classified in three categories and accounted for as follows:
		Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost with premiums and discounts recognized in interest income using the interest method over the period to maturity.
		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
		Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Gains and losses realized on the sale of available-for-sale securities are determined using the specific identification method.
		Declines in the fair value of individual available-for-sale and held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
Recognition of Interest Income
		Interest on loans is computed daily based on the principal amount outstanding. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected. Loan origination fees and related direct costs are deferred and recognized as an adjustment of yield on the interest method.
Other Real Estate
		Other real estate, which is included in other assets, represents real estate acquired through foreclosure and is stated at the lower of cost or fair value minus estimated cost to sell. The Bank's recorded value for other real estate was approximately $544,540 at December 31, 1994, and $594,693 at December 31, 1993. Other real estate owned by the Bank as of December 31, 1994, included: (1) a 16.88 acre truck stop located at the Bucksnort exit of I-40 and (2) a one-tenth interest in one hundred acres known as Town Center, located in the southern part of the town of Spring Hill, in northern Maury County, Tennessee on US 31 Highway. The properties are not depreciated.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses
		The allowance for possible loan losses is established by charges to operations based on the evaluation of the assets by Loan Review and the Special Assets Committee, economic conditions, and other factors considered necessary to maintain the allowance at an adequate level. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Effective January 1, 1995, the Corporation and the Bank will adopt Statement of Financial Accounting Standards No. 114 (as amended by No. 118), "Accounting by Creditors for Impairment of a Loan." The Bank established the position of Credit Administrator to coordinate the results of Loan Review and Special Assets Committee action for purposes of monitoring and managing loan impairment and maintenance of the allowance at required levels.
Premises and Equipment
		Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: buildings - 15 to 50 years; equipment - 3 to 33 years. Leasehold improvements are amortized over the lesser of the lease terms or the estimated lives of the improvements. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.
Trust Department Income
		Trust department income is recognized on the accrual basis in the applicable period earned.
Stock Split
		During 1994, the Corporation amended its corporate charter to increase the number of authorized shares of its common stock from 2,000,000 to 4,000,000 shares and on April 12, 1994, the Corporation's stockholders approved a two-for-one split effected in the form of a 100% stock dividend distributable May 30, 1994, to shareholders of record on April 12, 1994. In accordance with State corporate legal requirements, the transaction was recorded by a transfer from retained earnings to common stock in the amount of $7,000,000 ($10 for each additional share issued). All per share and share data in the accompanying consolidated financial statements and footnotes have been restated to give retroactive effect to the transaction.
Income Taxes
		The companies file a consolidated federal income tax return. They adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income Taxes", effective January 1, 1993. SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
		Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The cumulative effect, as of January 1, 1993, of this change in the method of accounting for income taxes was negligible.
Intangible Assets
	Deposit base intangibles identified in merger transactions are amortized over 42 to 70 months on the straight-line method. Total amortization expense charged to operations amounted to: 1994 - $168,020; 1993 - $168,020; and 1992 - $157,180.
Fair Value of Financial Instruments
		Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Bank, as for most financial institutions, almost all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an unforced, unforeclosed transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best available data, as generally provided in the Bank's regulatory reports to the Comptroller of the Currency. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. Changes in assumptions or the estimation methodologies used may have a material effect on the estimated fair values included in these notes. The Bank's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. Management is concerned that reasonable comparability between financial institutions may be distorted due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
		The following tables reflect the amortized value and fair value of investment securities.
		Securities carried at $81,583,779 and $65,067,259 at December 31, 1994 and 1993, respectively (fair value: 1994 - $80,148,047; 1993 - $68,257,884), were pledged to secure deposits and for other purposes as required or permitted by law. The fair value is established by an independent pricing service as of the approximate dates indicated. The differences between the amortized value and fair value reflect current interest rates and represent the potential loss (or gain) had the portfolio been liquidated on that date. Security losses (or gains) are realized only in the event of dispositions prior to maturity. The fair values of all securities at December 31, 1994, either equaled or exceeded the cost of those securities, or the decline in fair value is considered temporary.
		A schedule of net gains and losses realized on the disposition of investment securities, and the related tax effects, is presented in the following table. All net losses realized in 1994 resulted from sales of securities which were classified as available-for-sale.
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
		Proceeds from the call or sale of available-for-sale securities were $25,152,051 and from the call of held-to-maturity securities were $5,092,000 during 1994. Gross gains of $-0- and gross losses of $243,690 were realized on the dispositions 1994. Gross gains of $23,896 and gross losses of $ - - -0- were realized on the dispositions in 1993. Gross gains of $28,434 and gross losses of $ -0- were realized on the dispositions in 1992. At December 31, 1994, the Corporation did not hold investment securities of any single issuer, other than obligations of the U.S. Treasury and other U.S. Government agencies, whose aggregate book value exceeded ten percent of stockholders' equity.
	 	The following table shows the amortized cost, fair value, and weighted yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of investment securities at December 31, 1994, by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
		A summary of loans outstanding by category follows.
		A summary of loan maturities and the amounts of loans carrying fixed and variable interest rates as of December 31, 1994, follows.
	Non-performing loans are those which are accounted for on a non-accrual basis. Such loans had outstanding balances of approximately $2,611,000 and $2,133,000 at December 31, 1994 and 1993, respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
		A present value discounted cash flow methodology was used to value the net loan portfolio. The discount rate used in these calculations was the current rate at which new loans in the same classification for regulatory reporting purposes would be made. This rate was adjusted for credit loss and assumed prepayment risk. The estimated fair values and recorded book balances at December 31, 1994 were as follows.
		Certain parties (principally directors and senior officers of the Corporation or the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1994 and 1993, follows.
		These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank has a relationship other than the association of one of its directors in the capacity of officer or director. These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons. They did not involve more than the normal risk of collectiblity or present other unfavorable features.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
		Changes in the allowance for possible loan losses are as follows:
		For federal income tax purposes, the allowance for possible loan losses is maintained at the maximum allowable by the Internal Revenue Code.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
		The components of premises and equipment are as follows:
		Annual provisions for depreciation and amortization total $589,045 for 1994, $591,486 for 1993, and $544,896 for 1992. Included in premises and equipment cost and allowance for depreciation and amortization are certain fully depreciated assets totaling $1,843,000 at December 31, 1994.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
		The approval of the Comptroller of the Currency is required before the Bank's dividends in a given year may exceed the total of its net profit (as defined) for the year combined with retained net profits of the preceding two years. As of December 31, 1994, additional dividends of approximately $12,220,000 could have been declared by the Bank to the Corporation without regulatory agency approval.
NOTE 7 - LEASES
		Real property for four of the Bank's office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2001. In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms. In addition, various items of teller and office equipment are leased under cancelable and noncancelable operating leases. During 1994 the Bank committed to a data processing and communication network technology upgrade. An operating lease in excess of $1,600,000 for the equipment involved in this upgrade was closed in December, 1994, and is included in the following table. Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to $409,764, $254,121, and $245,991 for equipment leases, and $97,966, $82,030, and $72,350 for building leases, in 1994, 1993, and 1992, respectively. Future minimum lease commitments as of December 31, 1994, under all noncancelable operating leases with initial terms of one year or more follow.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
		The provisions for income taxes consist of the following:
							
		The deferred tax effects of principal temporary differences are shown in the following table:
							
		The timing differences in 1992 related principally to the provision for loan losses.
		A reconciliation of total income taxes reported with the amount of income taxes computed at the federal statutory rate (34% each year) is shown below. Total income taxes paid in 1994, 1993, and 1992 amounted to $2,431,332, $2,564,887 and $1,924,851, respectively.
							
							
							
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
		A net deferred tax asset was included in other assets in the accompanying consolidated balance sheet. The gross deferred tax asset was $1,091,594 at December 31, 1994 and $927,687 at December 31, 1993. There was no deferred tax liability or valuation allowance in either year. The deferred tax asset results mainly from the difference in the book basis and tax basis of the allowance for loan losses.
NOTE 9 - COMMITMENTS
		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.
		The total outstanding loan commitments and stand-by letters of credit in the normal course of business at December 31, 1994, were $19,956,000 and $2,439,000, respectively. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in making a loan.
		The loan portfolio is well diversified with loans generally secured by tangible personal property, real property, or stock. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Collateral requirements for the loan portfolio are based on credit evaluation of the customer. It is management's opinion that there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
		Interest paid on deposits and other borrowings during 1994, 1993, and 1992 amounted to $12,641,299, $12,243,317, and $14,150,933, respectively.
NOTE 11 - ACQUISITIONS
		On September 25, 1991, the Bank entered into a purchase and assumption agreement with Sovran Bank/Tennessee to purchase certain assets and assume certain deposit liabilities of Sovran Bank/Tennessee, Nashville, Tennessee, in Centerville, Hickman County, Tennessee, and Chapel Hill, Marshall County, Tennessee. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective January 24, 1992. Deposit liabilities totaling $42,543,252 (including $2,392,071 in Individual Retirement Accounts assumed prior to December 31, 1991) were assumed in the transaction in exchange for loans and other assets acquired totaling $14,254,385, and cash for the balance.
		In March, 1992, the Bank entered into a purchase and assumption agreement with Cavalry Banking FSB to purchase certain assets and assume certain deposit liabilities of the Chapel Hill office of Cavalry Banking FSB. The Office of the Comptroller of the Currency granted official authorization for this acquisition and it became effective October 31, 1992. Deposit liabilities totaling $4,336,289 were assumed in the transaction in exchange for the office building acquired for $100,069 and cash for the balance.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
		The following is a summary of the unaudited consolidated quarterly results of operations.
										
NOTE 13 - EMPLOYEE BENEFIT PLANS
		The Bank contributes to a defined contribution, profit-sharing plan covering employees who meet participation requirements. The amount of the contribution is discretionary as determined by the Board of Directors up to the maximum deduction allowed for federal income tax purposes. Contributions to the plan, that amounted to $602,010, $529,324, and $482,645, in 1994, 1993, and 1992, respectively, are included in salaries and employee benefits expense.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
		In 1992, the Bank formalized a nonqualified salary continuation plan for certain key officers. In connection with this plan, the value of the assets (1994 - $580,088; 1993 - $558,024) used to fund the plan and the related liability (1994 - - - $400,606; 1993 - $326,681) were included in other assets and other liabilities respectively. Single premium universal life insurance policies were purchased in 1993 to replace other policies and annuities that were redeemed. Insurance premiums of $515,000 were paid during 1993, of which $285,725 (net of the redemption proceeds) was capitalized. Net non-cash income of $22,448 in 1994 and $21,096 in 1993 is also included in the above asset values. The principal cost of this plan will be accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. Expense related to this plan was $98,925 in 1994 and $91,916 in 1993.
		The Bank also implemented a deferred compensation plan which permitted directors, beginning in 1993, to defer their director's fees and earn interest on the deferred amount. A liability increase and expense of $126,262 for 1994 and $125,036 for 1993 were recognized in the accompanying financial statements. In connection with this plan, a single premium universal life insurance policy was purchased on the life of each director who elected to participate. Insurance premiums of $1,425,000 were paid at the end of 1992, of which $1,399,816 was capitalized to reflect the cash surrender value at December 31, 1992. Additional single premium universal life insurance policies were purchased in 1993 for new participants. Insurance premiums of $215,000 were paid during 1993 and capitalized. Net non-cash income of $ 82,079 in 1994 and $82,079 in 1993 is also included in the cash surrender values of $1,750,119 and $1,696,895 at December 31, 1994 and 1993, respectively.
		The Bank is beneficiary on the insurance policies that fund the salary continuation plan and the deferred compensation plan. These policies have an aggregate face amount of $2,425,000.
NOTE 14 - DEPOSITS
		The Bank does not have any foreign offices and all deposits are serviced in its fourteen domestic offices. The average amounts of deposits and the average rates paid are summarized in the following table
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS (Continued)
		At December 31, time deposits of $100,000 or more had the following maturities.
		Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar liabilities. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The estimated fair values and recorded book balances at December 31, 1994, were as follows.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
		This summarizes the Corporation's disclosure of fair values of financial instruments made in accordance with the requirements of Statement of Financial Accounting Standards No.107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments".
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
				
				
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distributions of Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest Differential (Continued)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
	The following tables indicating the increase or decrease in net interest income components that are due to column and rate changes were shown on facing pages to facilitate comparison in the materials sent to our stockholders.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders' Equity,	 Interest Rates and 			Interest Differential (Continued)
																
																
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
	First Farmers and Merchants Corporation, a one-bank holding company, was formed during 1982. Its only subsidiary, First Farmers and Merchants National Bank, is a community bank that was established in 1909. The resulting financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.
	First Farmers and Merchants National Bank expanded its service area in January, 1992, through the acquisition of two offices of Sovran Bank/Tennessee in adjacent counties. During 1994, the Bank strengthened its presence in those four counties in middle Tennessee that it serves. Both deposits and loans in each of the four counties either maintained the same levels or increased. To more efficiently provide these expanding services and offer the range of products that Bank customers need and want, the Bank undertook a technology conversion involving data processing and communication links between its fourteen offices. The Bank is positioned to provide quality services in diverse markets and a dynamic interest rate environment. Our customers are already enjoying the "Impact" of this change as new services such as combined, laser printed statements; inquiring about balances, checks paid, deposits made, and making transfers between accounts through phone bank; and extended banking hours. A check card is being introduced in the first quarter of 1995.
	The first of the preceding tables entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL, presents average daily balances, interest income on a fully taxable equivalent basis and interest expense, as well as the average rates earned and paid on the major balance sheet items for the years 1994, 1993, and 1992. The second table sets forth, for the periods indicated, a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates. The rate/volume variances are allocated between rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each.
	The preceding tables plus the following discussion and financial information is presented to aid in understanding First Farmers and Merchants' current financial position and results of operations. The emphasis of this discussion will be on the years 1994, 1993, and 1992; however, financial information for prior years will also be presented when appropriate. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this material.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
	First Farmers and Merchants National Bank's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel. The following paragraphs provide a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization.
	The bank's average deposits grew during the last three years reflecting a 6.8% growth from 1993 to 1994, a 10.4% growth from 1992 to 1993, and a 27.8% growth from 1991 to 1992. The acquisitions in 1992 accounted for almost 13.0% of the growth during 1992. Average transaction and limited transaction accounts have shown the most growth during the last three years. The average Chairman's Club, super negotiable orders of withdrawal, insured money market deposits, and flexible investment accounts increased 9.5 % in 1994 compared to a 28.6% increase in 1993 and a 68.6 % increase in 1992. Average savings deposits increased 12.2% in 1994 compared to a 12.9% increase in 1993 and a 39.3% decrease in 1992. Average certificates of deposit increased .6% in 1994 compared to a 4.1% decrease in 1993 and a 9.2% increase in 1992. The increasing interest rate environment caused many customers to use interest bearing transaction and limited transaction accounts as holding vehicles while they watched rate movements trying to determine the best time to lock in a rate on a longer term product.
	Average earning assets increased 7.6% in 1994 compared to an 9.7% increase in 1993 and a 24.6% increase in 1992. As a financial institution, the Bank's primary investment is loans. At December 31, 1994, average net loans represented 60.5% of average earning assets. Total average net loans increased during the last three years showing a 6.1% growth from 1993 to 1994, an 8.6% growth from 1992 to 1993, and a 17.9% growth from 1991 to 1992. The loans acquired in the acquisitions previously mentioned accounted for 3.6% of the growth in 1992. Average investments represented 38.7% of average earning assets at December 31, 1994, and increased 11.6% in 1994, increased 11.9% in 1993, and increased 39.8% in 1992. The majority of the excess funds resulting from the acquisition of more deposits than loans was invested in securities due to the absence of increased loan demand in the new market areas in 1992. Average total assets increased during the last three years as evidenced by a 7.4% growth from 1993 to 1994, a 10.3% growth from 1992 to 1993, and a 25.5% growth from 1991 to 1992. Please refer to the color graphs on page 43 that illustrate this growth.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
	The primary objective of asset/liability management at the Bank is to achieve reasonable stability in net interest income throughout interest rate cycles. This objective is achieved by monitoring the relationship of rate sensitive earning assets to rate sensitive interest-beating liabilities (interest rate sensitivity) which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those which can be repriced to current market rates within a defined time period. The accompanying table shows the Bank's rate sensitive position at December 31, 1994, as measured by gap analysis (the difference between the earning asset and interest-bearing liability amounts scheduled to be repriced to current market rates in subsequent periods).
	As a policy, budgeted financial goals are monitored on a monthly basis by the Asset/Liability Committee where the actual dollar change in net interest income given different interest rate movements is reviewed. A dollar change in net interest income for a twelve month period of less than 3% of net interest income given different rate scenarios is considered an adequately flexible position. The net interest margin, on a tax equivalent basis, at December 31, 1994, 1993, and 1992 was 4.68%, 4.58%, and 4.67% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (Continued)
TABLE-Rate Sensitivity of Earning Assets and Interest-bearing Liabilities
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
	Historically, internal growth has financed the capital needs of the Bank. At December 31, 1994, the Corporation had a ratio of average capital to average assets of 9.25%. This compares to a ratio of average capital to average assets of 8.9% at December 31, 1993, and 8.8% at December 31, 1992.
	Cash dividends paid in 1994 were 9.6% more than those paid in 1993. The dividend to net income ratio was 20%. Additional dividends of approximately $12.3 million to the Corporation could have been declared by the subsidiary bank without regulatory agency approval. The Corporation plans to maintain or increase the payout ratio while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.
	Regulatory risk-adjusted capital adequacy standards were strengthened during 1992. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries) and certain classes of preferred stock are considered Tier 1 ("core") capital. Tier 2 ("total") capital consists of core capital plus subordinated debt, some types of preferred stock, and varying amounts of the Allowance for Possible Loan Losses. The minimum standard for a "well capitalized" bank is a risk-based core capital ratio of 6%, a risk- based total capital ratio of 10%, and a core capital to average total assets of 5%.
	As of December 31, 1994, the Bank's core and total risk-based ratios were 16.2% and 17.1% respectively. One year earlier, the comparable ratios were 15.6% and 16.4%, respectively. At year end 1994, the Bank had a ratio of average core equity to total average assets of 9%, up slightly from 8.6% at year end 1993.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
	Total interest income increased 7.3% in 1994 compared to a .4% decrease in 1993 and an increase of 6.6% in 1992. Interest and fees earned on loans increased 8.3% in 1994 compared to a 1.4% decrease in 1993 and a 1.1% increase in 1992. Interest earned on investment securities and other investments increased 5.3% in 1994 compared to a 1.9% increase in 1993 and a 22.7% increase in 1992.
Interest Expense
	Total interest expense increased 6.9% in 1994 compared to a 10.0% decrease in 1993 and a 6.3% decrease in 1992. The net interest margin (tax equivalent net interest income divided by average earning assets) has remained near 4.6% these last three years as indicated in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section above.
	Net interest income on a fully taxable equivalent basis is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demands by customers; (2) Federal Reserve Board monetary policy, and (3) fiscal and debt management policies of the federal government, including changes in tax laws.
Non-interest Income and Expense
	Non-interest income increased 4.2% during 1994 versus a 12.0% increase in 1993 and a 14.0% increase in 1992. Income earned by the Trust Department increased 45% during 1994. Charges for deposit services showed a 5% increase in 1994. The strategy to meet market demand for mortgage loans, while not keeping all of such loans in the bank's portfolio to protect asset flexibility, resulted in an increase in fee income from the sale of mortgages in the secondary market. Sales were at the strongest point during the first quarter of 1994. This also contributed to the increase in non-interest income in 1994. Also during the year, the Bank realized a $244 thousand dollar loss on the sale of a bond mutual fund investment.
	Non-interest expenses, excluding the provision for possible loan losses, increased 7.6% in 1994 compared to a 9.3% increase in 1993 and a 18.7% increase in 1992. Increased productivity and cost control efforts contributed to this improvement. Included in this category is Federal Deposit Insurance Corporation (FDIC) insurance premiums at the rate established for "well capitalized" institutions. Please refer to the discussion in the CAPITAL RESOURCES, CAPITAL AND DIVIDENDS section above for more information concerning the bank's capitalization.
Provision for Possible Loan Losses
	The provision for loan losses, representing amounts charged against operating income, increased 40.4% in 1994 compared to a 44.1% decrease in 1993 and a 7.7% increase in 1992. Management regularly monitors the allowance for possible losses and considers it to be adequate. The amount of the additions to the allowance for loan losses charged to operating expenses was based on the following factors: (1) national and local economic conditions, (2) past experience, and (3) Loan Review and Special Assets Committee review. The tables on the next page summarize average loan balances and reconciliations of the allowance for loan losses for each year. Additions to the allowances, which have been charged to operating expenses, are also disclosed.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
	The next tables present any risk elements in the loan portfolio and include all loans management considers to be potential problem loans. Management does not believe that there is a concentration of loans to a multiple number of borrowers engaged in similar activities.
	At December 31, 1994, non-accrual loans totaled $2.6 million or 1% of loans. Commercial loans comprised $.349 million of the total, with loans secured by real estate accounting for $1.5 million and installment loans $.771 million. All loans that are ninety days past due are placed in non-accrual status. The gross interest income that would have been recorded in the period then ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, is $193, $189, and $155 for the years ended December 31, 1994, 1993, and 1992 respectively. Interest accruals are discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
	Net income was 5.8% higher in 1994 than in 1993, 17.0% higher in 1993 than in 1992, and 20.4% higher in 1992 than in 1991. As indicated by the table of comparative data, the Corporation's return on average assets was 1.23% in 1994, 1.25% in 1993, and 1.18% in 1992. The return on equity remains strong at 14.1% in 1994, 14.9% in 1993, and 14.21% in 1992.
Net Interest Margin
	Mr. Waymon L. Hickman indicated in his opening message to stockholders that 1994 was a difficult year for many forms of investments. The stock market closed out its worst performance and the bond market experienced its largest calendar year decline in modern history. It was the first time since 1974 that both stock and bond funds fell in value during the same year. Even with these unfavorable results, an investment in F&M stock increased 18.4% in value, due primarily to very favorable earnings and continued demand for stock.
	A graph which illustrates an increasing net interest margin during the five years shown was included at the bottom of this page in the materials sent to our stockholders. As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT section earlier, the Bank's Asset/Liability Committee monitors interest rate sensitivity monthly. Through the use of simulation analysis to estimate future net interest income under varying interest rate conditions, the committee can establish pricing and maturity strategies to maintain that steady net interest margin. The simulation analysis uses the repricing information indicated in the table on page 37 and adjusts the current balance sheet to reflect the impact of different interest rate movements.
EFFECTS OF ECONOMY
	Current economic conditions have had a definite effect on the reported financial condition and results of operation. Market interest rates declined in 1992 and 1993, resulting in lower yields on earning assets and lower rates on interest-bearing liabilities. The market interest rates increased in 1994, resulting in higher yields on earning assets as well as higher rates on interest-bearing liabilities. Historically, noninterest-bearing demand deposits and regular savings accounts provided a relatively fixed rate source of funding for earning assets. This was illustrated again in 1993 and 1994 as these fixed rate and noninterest-bearing deposits continued to provide a relatively stable net yield from this funding source.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EFFECTS OF ECONOMY (Continued)
	The closing of some industrial plants that have been long term community neighbors and the reduction of operations in other plants in the area have reduced the impact of increases in the automotive industry in the area. First Farmers and Merchants Corporation continues to work with local citizens to improve the economic conditions of the area.
SHAREHOLDER INFORMATION
	The 1,400,000 shares of common stock of First Farmers & Merchants Corporation outstanding at December 31, 1994, had a market value of $63 million and were held by 1,405 identifiable individuals located mostly in the market area. A small number of additional shareholders cannot be identified individually since some bank nominees, including the bank's Trust Department, are listed as single owners when, in fact, these holdings represent large numbers of shareholders. No single shareholder's ownership exceeded five percent at year end.
	There is no established public trading market for the stock. The following table lists the high and low price of the Corporation's common stock, as well as the semiannual dividend paid per share, in each of the last three years.
	Four color graphs are included on the left hand side of this page in the materials sent to our stockholders. The first one illustrates net income for the last five years using information taken from the "FIVE YEAR COMPARISON" table included above. The second one illustrates return on average assets for the last five years using information from the "COMPARATIVE DATA" table on the next page. The third and fourth graphs illustrate return on stockholders' equity and earnings per share with cash dividends for the last five years. The information for both of these graphs was taken form the "COMPARATIVE DATA" table on the following pages.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
	In summary, the above table and the graphs on these pages summarize the presentation in the preceding pages, a unique perspective on the internal structures of the Corporation and the Bank that provide the strength in our organization. Each stockholder can be proud of this performance. Our stockholders are the real strength of our organization. Thank you for your help and support.
Item 9.

Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant.
The Directors and Executive officers of the Corporation are included in First Farmers and Merchants Corporation's definitive Proxy Statement pursuant to Regulation 14 A, Solicitation of Proxies, which has been filed since March 17, 1995 and which involves the election of Directors. The present terms of Directors and officers extend to April 18, 1995.
Executive Officers of Registrant
The following is a list as of March 8, 1995, showing the names and ages of all executive officers of First Farmers and Merchants Corporation ("FFMC"), the nature of any family relationships between them, and all positions and offices with the Corporation held by each of them:
Executive Officers of Registrant - Continued
Item 11.

Item 11. Executive Compensation and Transactions.
Information on executive compensation and transactions is included First Farmers and Merchants Corporation's definitive Proxy Statement pursuant to Regulation 14 A, Solicitation of Proxies, which has been filed since March 17, 1995, and which involves the election of Directors.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security ownership of certain beneficial owners and management is included in First Farmers and Merchants Corporation's definitive Proxy Statement pursuant to Regulation 14 A, Solicitation of Proxies, which has been filed since March 17, 1995, and which involves the election of Directors.
Item 13.

Item 13. Certain Relationships and Related Transaction.
A discussion of certain relationships and related transaction is included in First Farmers and Merchants Corporation's definitive Proxy Statement pursuant to Regulation 14 A, Solicitation of proxies, which has been filed since March 17, 1995, and which involves the election of directors.
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.*
	(a)	(1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report.
		(3) - The following modules are filed herewith:
ANNUAL_REPORT_S			 Annual Report to Stockholders
DEFINITIVE_PROX Definitive Proxy Statement
OPINION Report of Independent Certified Public Accountants
OFF_SIGNATURES Officer Signatures
DIR_SIGNATURES Director Signatures
	(d)	Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report.
*By-Laws remain the same as those included in the Form 10-K submitted for the fiscal year ended December 31, 1990. In addition, a Form 8-K was completed and submitted separately regarding a purchase that was consummated January 24, 1992.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FARMERS AND MERCHANTS CORPORATION
BY	/s/ Waymon L. Hickman
	 Waymon L. Hickman, President
		 (Chief Executive Officer)
Date	 April 11, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
	/s / Thomas Randall Stevens
	 Thomas Randall Stevens, Vice President
(Chief Administrative Officer)
Date	 April 11, 1995
	/s / Patricia N. McClanahan
	 Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
Date	 April 11, 1995
Signatures -- continued
/s/ Kenneth A. Abercrombie 	 /s/ Sam D. Kennedy
Kenneth A. Abercrombie, Director	 Sam D. Kennedy, Director
Date April 11, 1995 	Date April 11, 1995
/s/ James L. Bailey, Jr. 	/s/ Tillman Knox
James L. Bailey, Jr., Director	 Tillman Knox, Director
Date April 11, 1995 	Date April 11, 1995
/s/ Harlan D. Bowsher 	/s/ Joe E. Lancaster
Harlan D. Bowsher, Director 	Joe E. Lancaster, Director
Date April 11, 1995 	Date April 11, 1995
/s/ H. Terry Cook, Jr. 	 /s/ Virgil H. Moore, Jr.
H. Terry Cook, Jr., Director	 Virgil H. Moore, Jr., Director
Date April 11, 1995 	Date April 11, 1995
/s/ W. J. Davis, Jr. 	/s/ Thomas Randall Stevens
W. J. Davis, Jr., Director	 Thomas Randall Stevens, Director
Date April 11, 1995 	Date April 11, 1995
/s/ Tom Napier Gordon 	/s/ Dan C. Wheeler
Tom Napier Gordon, Director	 Dan C. Wheeler, Director
Date April 11, 1995 	Date April 11, 1995
/s/ Edwin W. Halliday 	/s/ David I. Wise
Edwin W. Halliday, Director 	David I. Wise, Director
Date April 11, 1995 	Date April 11, 1995
/s/ Waymon L. Hickman 	/s/ W. Donald Wright
Waymon L. Hickman, Director	 W. Donald Wright, Director
Date April 11, 1995 	Date April 11, 1995
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2) ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1994
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
FORM 10-K -- ITEM 14(a)(1) and (2)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statements of First Farmers and Merchants Corporation and Subsidiary, included in the annual report of the registrant to its security holders for the year ended December 31, 1994, are referenced in Item 8 and included in the Annual Report to Stockholders:
	Consolidated balance sheets -- December 31, 1994 and 1993
	Consolidated statements of income -- Years ended December 31, 1994, 1993, and 1992
	Consolidated statements of cash flows -- Years ended December 31, 1994, 1993, and 1992
	Notes to consolidated financial statements -- December 31, 1994
The following financial statement schedules of First Farmers and Merchants Corporation and subsidiary are included in Item 14(d):
	None
All other schedules to the consolidated financial statements required by Article 9 of Regulation S-X and all other schedules to the financial statements of the registrant required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore, have been omitted.
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
Exhibit Number			 	Title or Description
	ANNUAL_REPORT_S 			Annual Report to Stockholders
OPINION Report of Independent Certified Public Accountants
DEFINITIVE_PROX Definitive Proxy Statement
OFF_SIGNATURES Officer Signatures
DIR_SIGNATURES Director Signatures