Edgar Filing: FIRST FARMERS & MERCHANTS CORP

First Farmers 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________________

Commission File Numbers: 000-10972

First Farmers and Merchants Corporation

(Exact name of registrant as specified in its charter)

Tennessee	62-1148660
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

816 South Garden Street
Columbia, Tennessee	38402-1148
(Address of principal executive offices)	(Zip Code)

931-388-3145

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X]Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X]Yes [ ] No

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

Large accelerated filer [ ]	Accelerated filer [ X ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

As of August 5, 2014, the registrant had 4,936,817 shares of common stock outstanding.

All dollar amounts are reported in thousands except share and per share data.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

The following unaudited condensed consolidated financial statements of the Registrant are included in this Report:

Condensed consolidated balance sheets – June 30, 2014 and December 31, 2013.

Condensed consolidated statements of income - For the three and six months ended June 30, 2014 and June 30, 2013.

Condensed consolidated statements of comprehensive income (loss) - For the three and six months ended June 30, 2014 and June 30, 2013.

Condensed consolidated statements of cash flows - For the six months ended June 30, 2014 and June 30, 2013.

Selected notes to condensed consolidated financial statements.

All dollar amounts are reported in thousands except share and per share data.

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,			December 31,
		2014			2013
		(unaudited)			(1)
ASSETS	Cash and due from banks	$	24,446	$		20,391
	Interest-bearing deposits		11,423			25,167
	Federal funds sold		1,300			9,850
	Total cash and cash equivalents		37,169			55,408
	Securities:
	Available-for-sale (amortized cost $372,737
	and $346,892 as of June 30, 2014 and December 31, 2013,
	respectively)		365,017			329,714
	Held-to-maturity (fair market value $24,528
	and $28,595 as of June 30, 2014 and December 31, 2013,
	respectively)		23,902			27,839
	Total securities		388,919			357,553
	Loans, net of deferred fees		618,687			606,766
	Allowance for loan and lease losses		(8,635)			(8,595)
	Net loans		610,052			598,171
	Bank premises and equipment, net		24,799			24,868
	Other real estate owned		859			1,438
	Bank owned life insurance		26,231			25,867
	Goodwill		9,018			9,018
	Deferred tax asset		7,221			10,905
	Other assets		10,705			10,605
	TOTAL ASSETS	$	1,114,973	$		1,093,833
LIABILITIES	Deposits
	Noninterest-bearing	$	185,420	$		179,823
	Interest-bearing		781,463			777,514
	Total deposits		966,883			957,337
	Securities sold under agreements to repurchase		20,738			18,095
	Accounts payable and accrued liabilities		18,040			15,728
	TOTAL LIABILITIES		1,005,661			991,160
SHAREHOLDERS’	Common stock - $10 par value per share, 8,000,000 shares
EQUITY	authorized; 4,936,817 and 5,021,012 shares issued
	and outstanding as of June 30, 2014 and
	December 31, 2013, respectively		49,368			50,210
	Retained earnings		63,093			61,369
	Accumulated other comprehensive loss		(3,244)			(9,001)
	TOTAL SHAREHOLDERS’ EQUITY BEFORE
	NONCONTROLLING INTEREST - PREFERRED STOCK OF
	SUBSIDIARY		109,217			102,578
	Noncontrolling interest - preferred stock of subsidiary		95			95
	TOTAL SHAREHOLDERS’ EQUITY		109,312			102,673
	TOTAL LIABILITIES AND
	SHAREHOLDERS’ EQUITY	$	1,114,973		$	1,093,833

(1) Derived from audited financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

All dollar amounts are reported in thousands except share and per share data.

FIRST FARMERS AND MERCHANTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	(unaudited)
			Three months ended						Six months ended
			2014			2013			2014			2013
INTEREST AND	Interest and fees on loans	$	7,006	$		7,314	$		13,942	$		14,276
DIVIDEND INCOME	Income on investment securities
	Taxable interest		1,407			1,381			2,761			2,818
	Exempt from federal income tax		610			737			1,289			1,483
	Other interest and dividend income		80			91			153			169
	Total interest income		9,103			9,523			18,145			18,746
INTEREST EXPENSE	Interest on deposits		607			696			1,211			1,431
	Interest on other borrowings		16			55			32			154
	Total interest expense		623			751			1,243			1,585
	Net interest income		8,480			8,772			16,902			17,161
	Provision for loan and lease losses		-			-			-			-
	Net interest income after provision		8,480			8,772			16,902			17,161
NONINTEREST	Gain on loans sold		59			151			95			330
INCOME	Trust department income		583			564			1,253			1,160
	Service fees on deposit accounts		1,644			1,602			3,164			3,167
	Brokerage fees		118			92			222			199
	Earnings on bank owned life insurance		78			114			189			201
	Gain on sale of securities		502			6			547			829
	Loss on foreclosed property		(10)			(29)			(4)			(168)
	Other non-interest income		117			120			276			231
	Total non-interest income		3,091			2,620			5,742			5,949
NONINTEREST	Salaries and employee benefits		4,376			4,525			8,897			8,997
EXPENSE	Net occupancy expense		476			533			943			1,056
	Depreciation expense		351			385			711			765
	Data processing expense		573			605			1,161			1,149
	Legal and professional fees		200			305			428			488
	Stationary and office supplies		85			71			155			145
	Advertising and promotions		351			288			679			541
	FDIC insurance premium expense		160			51			289			237
	Other real estate expense		44			18			51			39
	Other noninterest expense		1,409			1,376			2,809			2,845
	Total noninterest expenses		8,025			8,157			16,123			16,262
	Income before provision for income taxes		3,546			3,235			6,521			6,848
	Provision for income taxes		941			842			1,654			1,399
	Net income before noncontrolling interest -
	dividends on preferred stock of subsidiary		2,605			2,393			4,867			5,449
	Noncontrolling interest-dividends on
	preferred stock subsidiary		8			8			8			8
	Net income for common shareholders	$	2,597		$	2,385		$	4,859		$	5,441
	Weighted average shares outstanding	4,977,506		5,133,051			4,997,536			5,155,779
	Earnings per share	$	0.52	$		0.46	$		0.97	$		1.06

The accompanying notes are an integral part of the condensed consolidated financial statements.

All dollar amounts are reported in thousands except share and per share data.

FIRST FARMERS AND MERCHANTS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
		Three months ended						Six months ended
		June 30,						June 30,
(unaudited)		2014			2013			2014			2013
Net income	$	2,597	$		2,385	$		4,859	$		5,441
Comprehensive income (loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of
taxes of $1,955 and ($5,044) for the three months ended June 30, 2014 and
2013, respectively and net of taxes of $3,852 and ($6,064) for the six months
ended June 30, 2014 and 2013, respectively		3,123			(8,058)			6,153			(9,687)
Less: reclassification adjustment for realized gains included in net income, net
of taxes of ($194) and ($2), for the three months ended June 30, 2014 and
2013, respectively and net of taxes of ($211) and ($319) for the six months
ended June 30, 2014 and 2013, respectively		(308)			(4)			(336)			(510)
Change in unfunded portion of postretirement benefit obligations, net of taxes
of ($19), and $1,038, for the three months ended June 30, 2014 and 2013,
respectively and net of taxes of ($37) and $1,008 for the six months ended
June 30, 2014 and 2013, respectively		(31)			1,657			(60)			1,611

Other comprehensive income (loss)		2,784			(6,404)			5,757			(8,586)
Comprehensive income (loss)		5,381			(4,019)			10,616			(3,145)
Less: comprehensive income attributable to the noncontrolling interest		-			-			-			-
Total comprehensive income (loss)	$	5,381		$	(4,019)		$	10,616		$	(3,145)

The accompanying notes are an integral part of the condensed consolidated financial statements.

All dollar amounts are reported in thousands except share and per share data.

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six months ended June 30,
	(unaudited)		2014			2013
OPERATING	Net income available for common shareholders	$	4,859	$		5,441
ACTIVITIES	Adjustments to reconcile net income to net cash provided
	by (used in) operating activities
	Provision for loan losses		-			-
	Provision for depreciation and amortization of
	premises and equipment		711			765
	Deferred tax expense		80			(160)
	Net securities gains		(547)			(829)
	Gains on loans sold		(95)			(330)
	Proceeds from sale of mortgage loans held for sale		4,509			18,072
	Funding of mortgage loans held for sale		(4,730)			(16,645)
	Loss on other real estate owned		4			168
	Loss on sale of assets		1			16
	Amortization of investment security premiums,
	net of accretion of discounts		513			670
	Increase in cash surrender value of life insurance contracts		(189)			(201)
	(Increase) decrease in
	other assets		216			1,394
	Increase (decrease) in
	other liabilities		2,259			1,623
	Total adjustments		2,732			4,543
	Net cash provided by operating activities		7,591			9,984
INVESTING	Proceeds from sales of available-for-sale securities		19,475			137,150
ACTIVITIES	Proceeds from maturities and calls of available-for-sale securities		15,095			32,658
	Proceeds from maturities and calls of held-to-maturity securities		3,930			1,835
	Purchases of investment securities
	available-for-sale		(60,374)			(187,475)
	Net decrease in loans		(11,886)			(10,922)
	Proceeds from sale of other real estate owned		567			553
	Purchases of premises and equipment		(643)			(177)
	Purchase of life insurance policy		(175)			(485)
	Net cash used in investing activities		(34,011)			(26,863)
FINANCING	Net increase (decrease) in deposits		9,546			(11,128)
ACTIVITIES	Net increase in securities sold under
	agreements to repurchase		2,643			727
	Payments to FHLB borrowings		-			(7,000)
	Repurchase of common stock		(2,150)			(2,101)
	Cash dividends paid on common stock		(1,858)			(1,883)
	Net cash provided by (used in) financing activities		8,181			(21,385)
	Decrease in cash and cash equivalents		(18,239)			(38,264)
	Cash and cash equivalents at beginning of period		55,408			70,396
	Cash and cash equivalents at end of period	$	37,169		$	32,132
	Supplemental disclosures of cash flow information
	Interest paid	$	1,190	$		1,548
	Income taxes paid	$	1,457	$		655
	Loans to facilitate sale of other real estate owned	$	-	$		1,760
	Real estate acquired in settlement of loans	$	5	$		312

The accompanying notes are an integral part of the condensed consolidated financial statements.

All dollar amounts are reported in thousands except share and per share data.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management of First Farmers and Merchants Corporation (the “Corporation”), necessary to fairly present the financial position, results of operations and cash flows of the Corporation. Those adjustments consist only of normal recurring adjustments.

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Corporation’s Annual Report on Form 10-K. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 for further information in this regard. The condensed consolidated balance sheet of the Corporation as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Corporation as of that date. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Reclassifications: Certain reclassifications considered to be immaterial have been made in the prior year condensed consolidated financial statements to conform to current year presentation. These reclassifications had no effect on net income.

NOTE 2 –ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”) BY COMPONENT

Amounts reclassified from AOCI and the affected line items in the statements of income during the periods ended June 30, 2014 and 2013, were as follows:

		Amounts reclassified from AOCI
		Six months ended
	June 30, 2014			June 30, 2013	Affected line item in the Statements of Income
Unrealized gains on available-for-sale
securities
	$	547	$	829	Gain on sale of securities
					Total reclassified amount before tax and
		547		829	noncontrolling interest
		(211)		(319)	Tax expense
		336		510	Net reclassified amount
Amortization of defined benefit pension items
					Components are included in the computation of net
Actuarial losses		(97)		(47)	periodic pension cost and presented in Note 7
		(97)		(47)	Total reclassified amount before tax
		37		18	Tax benefit
		(60)		(29)	Net reclassified amount
Total reclassifications out of AOCI	$	276	$	481

All dollar amounts are reported in thousands except share and per share data.

		Amounts reclassified from AOCI
		Three months ended
	June 30, 2014				June 30, 2013	Affected line item in the Statements of Income
Unrealized gains on available-for-sale
securities
	$	502	$		6	Gain on sale of securities
						Total reclassified amount before tax and
		502			6	noncontrolling interest
		(193)			(2)	Tax expense
		309			4	Net reclassified amount
Amortization of defined benefit pension items
Actuarial gains		(50)			-	Components are included in the computation of net
		(50)			-	Total reclassified amount before tax
		19			-	Tax expense
		(31)			-	Net reclassified amount
Total reclassifications out of AOCI	$	278		$	4

The components of accumulated other comprehensive income, included in shareholder’s equity, are as follows:

		June 30, 2014	December 31, 2013
Net unrealized losses on available-for-sale securities	$	(7,720)	$	(17,178)
Net defined benefit pension plan deferred amounts		2,445		2,542
		(5,275)		(14,636)
Tax effect		2,031		5,635
Accumulated other comprehensive loss	$	(3,244)	$	(9,001)

NOTE 3 – FAIR VALUE MEASUREMENTS

The fair value of an asset or liability is the price that would be received in a sale of that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Fair value measurement must maximize the use of observable inputs and minimize the use of unobservable inputs. In estimating fair value, the Corporation utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, market consensus, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

All dollar amounts are reported in thousands except share and per share data.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Corporation’s monthly and/or quarterly valuation process.

Recurring Measurements

The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and by the level within the fair value hierarchy utilized to measure fair value:

Assets measured at fair value on a recurring basis as of June 30, 2014
Available-for-sale securities	Level 1				Level 2	Level 3				Total
U.S. government agencies	$	-	$		109,401	$	-	$		109,401
U.S. government sponsored agency mortgage backed securities		-			195,706		-			195,706
States and political subdivisions		-			40,940		-			40,940
Corporate bonds		-			18,970		-			18,970
Total assets at fair value	$	-	$		365,017	$	-	$		365,017
Assets measured at fair value on a recurring basis as of December 31, 2013
Available-for-sale securities	Level 1				Level 2	Level 3				Total
U.S. government agencies	$	-	$		105,072	$	-	$		105,072
U.S. government sponsored agency mortgage backed securities		-			157,423		-			157,423
States and political subdivisions		-			46,337		-			46,337
Corporate bonds		-			20,882		-			20,882
Total assets at fair value	$	-		$	329,714	$	-		$	329,714

Below is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There were no significant changes in the valuation techniques during the six months ended June 30, 2014.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, the Corporation obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. The Corporation reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other factors. U.S. government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities and corporate bonds are classified as Level 2 inputs.

Nonrecurring Measurements

The following table summarizes financial assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013, by the level within the fair value hierarchy utilized to measure fair value:

June 30, 2014	Level 1			Level 2			Level 3			Total
Impaired loans (collateral-dependent)	$	-	$		-	$		4,416	$	4,416
Other real estate owned	$	-	$		-	$		-	$	-
December 31, 2013	Level 1			Level 2			Level 3			Total
Impaired loans (collateral-dependent)	$	-	$		-	$		2,214	$	2,214
Other real estate owned	$	-	$		-	$		208	$	208

Impaired Loans (Collateral-dependent)

All dollar amounts are reported in thousands except share and per share data.

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Corporation considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results. Fair value adjustments for collateral-dependent impaired loans for each of the six months ended June 30, 2014 and 2013 were $916 and $342, respectively, and $79 for the year ended December 31, 2013.

Loans considered impaired under ASC 310-35, “Impairment of a Loan,” are loans for which, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) subsequent write-downs that are based on the observable market price or current appraised value of the collateral or (2) changes in the specific reserve.

Other Real Estate Owned

Other real estate owned (“OREO”) is initially recorded at fair value at the time of acquisition, as determined by independent appraisal or evaluation by the Corporation, less costs to sell when the real estate is acquired in settlement of loans. Quarterly evaluations of OREO are performed to determine if there has been any subsequent decline in the value of OREO properties. Estimated fair value of OREO is based on appraisals or evaluations, less costs to sell. OREO is classified within Level 3 of the fair value hierarchy. OREO assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. There were no fair value adjustments for OREO for the six months ended June 30, 2014. Fair value adjustments for OREO for the six months ended June 30, 2013 were $0, and $395 for the year ended December 31, 2013.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are required annually and reviewed for accuracy and consistency by the Chief Credit Officer. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisers are selected from the list of approved appraisers maintained by management.

All dollar amounts are reported in thousands except share and per share data.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements:

		Quantitative Information about Level 3 Fair Value Measurements
	Fair value at		Valuation	Unobservable
	June 30, 2014		technique(s)	input		Range (weighted average)
			Market
			comparable	Marketability
Impaired loans (collateral-dependent)	$	4,416	properties	discount	5.0% - 37.0% (35%)
			Market
			comparable	Marketability
Other real estate owned	$	-	properties	discount		N/A

		Quantitative Information about Level 3 Fair Value Measurements
	Fair value at
	December 31,		Valuation	Unobservable
	2013		technique(s)	input		Range (weighted average)
			Market
			comparable	Marketability
Impaired loans (collateral-dependent)	$	2,214	properties	discount	5.0% - 10.0% (7%)
			Market
			comparable	Marketability
Other real estate owned	$	208	properties	discount	5.0% - 10.0% (7%)

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value:

Cash and due from banks – The carrying amount approximates fair value.

Interest bearing deposits in other banks – The carrying amount approximates fair value.

Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank (“FHLB”) stock approximates fair value based on the redemption provisions of the FHLB.

Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.

Federal funds sold – The carrying amount approximates fair value.

Securities available for sale – The carrying amount approximates fair value.

Securities held-to-maturity – Fair values are based on quoted market prices, if available. If a quoted price is not available, fair value is estimated using quoted prices for similar securities. The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management. Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.

Loans held for sale – The fair value is predetermined at origination based on sale price.

All dollar amounts are reported in thousands except share and per share data.

Loans (net of the allowance for loan and leases losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other variable rate loans, the carrying amount approximates fair value.

Accrued interest receivable – The carrying amount approximates fair value.

Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. For deposits including demand deposits, savings accounts, NOW accounts and certain money market accounts, the carrying value approximates fair value.

Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates.

Advances from FHLB – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.

Accrued interest payable – The carrying amount approximates fair value.

Commitments to extend credit and letters of credit – The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair values of these commitments are not material.

The following table presents estimated fair values of the Corporation’s financial instruments as of June 30, 2014 and December 31, 2013, and indicates the level within the fair value hierarchy of the valuation techniques:

			Fair value measurements at June 30, 2014 using
		Quoted prices in
		active markets for			Significant other				Significant
	Carrying	identical assets			observable inputs			unobservable inputs
June 30, 2014	amount		(Level 1)			(Level 2)			(Level 3)
Financial assets
Cash and due from banks	$ 24,446	$	24,446	$		-	$		-
Interest-bearing deposits in other banks	11,423		11,423			-			-
Federal funds sold	1,300		1,300			-			-
Federal Home Loan Bank and Federal Reserve Bank stock	3,879		-			3,879			-
Securities available-for-sale	365,017		-			365,017			-
Securities held-to-maturity	23,902		-			24,528			-
Loans held for sale	674		-			674			-
Loans, net	610,052		-			-			618,673
Accrued interest receivable	4,078		-			4,078			-
Financial liabilities
Non-interest bearing deposits	185,420		185,420			-			-
Interest bearing deposits	781,463		-			782,335			-
Repurchase agreements	20,738		-			20,738			-
Accrued interest payable	610		-			610			-
Off-balance sheet credit related instruments:
Commitments to extend credit	-		-			-			-
Letters of credit	-		-			-			-

All dollar amounts are reported in thousands except share and per share data.

			Fair value measurements at December 31, 2013 using
		Quoted prices in
		active markets for			Significant other				Significant
	Carrying	identical assets			observable inputs			unobservable inputs
December 31, 2013	amount		(Level 1)			(Level 2)			(Level 3)
Financial assets
Cash and due from banks	$ 20,391	$	20,391	$		-	$		-
Interest-bearing deposits in other banks	25,167		25,167			-			-
Federal funds sold	9,850		9,850			-			-
Federal Home Loan Bank and Federal Reserve Bank stock	3,879		-			3,879			-
Securities available-for-sale	329,714		-			329,714			-
Securities held-to-maturity	27,839		-			28,595			-
Loans held for sale	327		-			327			-
Loans, net	598,171		-			-			607,113
Accrued interest receivable	4,183		-			4,183			-
Financial liabilities
Non-interest bearing deposits	179,823		179,823			-			-
Interest bearing deposits	777,514		-			779,224			-
Repurchase agreements	18,095		-			18,095			-
Accrued interest payable	663		-			663			-
Off-balance sheet credit related instruments:
Commitments to extend credit	-		-			-			-
Letters of credit	-		-			-			-

NOTE 4 – SECURITIES

The amortized cost and estimated fair value of securities at June 30, 2014 and December 31, 2013 were as follows:

	Amortized			Gross unrealized				Fair
June 30, 2014	cost			Gains	Losses			value
Available-for-sale securities
U.S. government agencies	$	113,417	$	17	$	4,033	$	109,401
U.S. government sponsored agency mortgage backed securities		201,086		57		5,437		195,706
States and political subdivisions		39,454		1,558		72		40,940
Corporate bonds		18,780		219		29		18,970
	$	372,737	$	1,851	$	9,571	$	365,017
Held-to-maturity securities
States and political subdivisions	$	23,902	$	626	$	-	$	24,528
	Amortized			Gross unrealized				Fair
December 31, 2013	cost			Gains	Losses			value
Available-for-sale securities
U.S. government agencies	$	112,863	$	-	$	7,791	$	105,072
U.S. government sponsored agency mortgage backed securities		168,045		27		10,649		157,423
States and political subdivisions		45,237		1,240		140		46,337
Corporate bonds		20,747		280		145		20,882
	$	346,892	$	1,547	$	18,725	$	329,714
Held-to-maturity securities
States and political subdivisions	$	27,839	$	756	$	-	$	28,595

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2014 and December 31, 2013 was $294,828 and $269,691, which was 76% and 75%, respectively, of the Corporation’s aggregate available-for-sale and held-to-maturity investment portfolio. The Corporation evaluates

All dollar amounts are reported in thousands except share and per share data.

its investment portfolio on a quarterly basis for impairment. The analysis performed as of June 30, 2014 and December 31, 2013 indicated that all impairment was considered temporary, market driven due primarily to fluctuations in market interest rates and not credit-related.

The following table shows the Corporation’s investments’ gross unrealized losses and fair value of the Corporation’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities had been in a continuous unrealized loss position at June 30, 2014 and December 31, 2013:

June 30, 2014			Less than 12 months				12 months or greater							Total
			Fair	Unrealized			Fair	Unrealized			Fair				Unrealized
Type of security			value	losses			value	losses			value				losses
U.S. government agencies	$		4,501	$	10	$	103,668	$	4,023		$	108,169			$	4,033
U.S. government sponsored agency mortgage
backed securities			36,136		175		137,879		5,262			174,015				5,437
States and political subdivisions			5,653		42		2,147		30	7,800						72
Corporate bonds			1,311		2		3,533		27		4,844					29
	$		47,601	$	229	$	247,227	$	9,342		$294,828				$	9,571
			Fair	Unrealized			Fair	Unrealized			Fair				Unrealized
Type of security			value	losses			value	losses			value				losses
U.S. government agencies	$		100,533	$	7,330	$	4,539	$	461		$		105,072		$	7,791
U.S. government sponsored agency mortgage
backed securities		144,134			10,073		8,698		576	152,832						10,649
States and political subdivisions			2,615		140		-		-	2,615						140
Corporate bonds			8,590		121		582		24		9,172					145
	$	255,872		$	17,664	$	13,819	$	1,061		$		269,691		$	18,725

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available-for-sale				Held-to-maturity
June 30, 2014	Amortized		Estimated		Amortized			Estimated
	cost		fair value		cost			fair value
Within one year	$	4,005	$	4,052	$	3,575	$	3,653
One to five years		33,454		33,419		5,334		5,507
Five to ten years		115,873		112,826		14,993		15,368
After ten years		18,319		19,014		-		-
Mortgage-backed securities		201,086		195,706		-		-
Total	$	372,737	$	365,017	$	23,902	$	24,528

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $218,036 at June 30, 2014 and $210,494 at December 31, 2013.

The book value of securities sold under agreements to repurchase amounted to $34,975 at June 30, 2014 and $34,978 at December 31, 2013.

The Corporation realized gross gains of approximately $560 and $6 for the three month periods ending June 30, 2014 and 2013, respectively, and gross gains of approximately $605 and $829, for the six months ending June 30, 2014 and 2013, respectively, resulting from sales of available-for-sale securities. Gross losses of approximately $58 were included in the three and six-month periods ended June 30, 2014. Gross losses of approximately $196 were included in the three and six-month periods ended June 30, 2013.

All dollar amounts are reported in thousands except share and per share data.

NOTE 5 – LOANS

The following table presents the Corporation’s loans by class as of June 30, 2014 and December 31, 2013:

		June 30, 2014	December 31, 2013
Commercial:
Commercial and industrial	$	88,990	$	94,702
Non-farm, nonresidential real estate		171,900		176,213
Construction and development		40,955		29,938
Commercial loans secured by real estate		32,249		26,940
Other commercial		23,429		26,582
Total commercial		357,523		354,375
Residential:
Consumer loans		9,986		10,957
Single family residential		222,156		213,763
Other retail		29,022		27,671
Total residential and consumer		261,164		252,391
		618,687		606,766
Less:
Allowance for possible loan losses		(8,635)		(8,595)
Total net loans	$	610,052	$	598,171

The amount of capitalized fees and costs calculated in accordance with ASC 310-20 included in the above loan totals were $908 and $831 at June 30, 2014 and December 31, 2013.

Loan Origination/Risk Management. The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of credit risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding a borrower’s ability to operate profitably and expand its business prudently. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Corporation’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Corporation also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2014, approximately half of the outstanding principal balance of the Corporation’s commercial real estate loans was secured by owner-occupied properties.

All dollar amounts are reported in thousands except share and per share data.

With respect to loans to developers and builders (construction and development) that are secured by non-owner occupied properties that the Corporation may originate from time to time, the Corporation generally requires the borrower to have had an existing relationship with the Corporation and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans because of their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Corporation originates consumer retail loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer retail loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Corporation contracts with a third party vendor to perform loan reviews. The Corporation reviews and validates the credit risk program on an annual basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

A concentration of credit occurs when obligations, direct or indirect, of the same or affiliated interests represent 15% or more of the Corporation’s capital structure. The Board of Directors recognizes that the Corporation’s geographic market area imposes some limitations regarding loan diversification if the Corporation is to perform the function for which it has been chartered. Specifically, lending to qualified borrowers within the Corporation’s market area will naturally cause concentrations of real estate loans in the primary communities served by the Corporation and loans to employees of major employers in the area.

All closed-end commercial loans (excluding loans secured by real estate) are charged off no later than 90 days delinquent. If a loan is considered uncollectable, it is charged off earlier than 90 days delinquent. When a commercial loan secured by real estate is past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual with a specific reserve equal to the difference between book value and fair value assigned to the credit until such time as the property has been foreclosed upon. When the foreclosed property has been legally assigned to the Corporation, a charge-off is taken with the remaining balance, which reflects the fair value less estimated costs to sell, transferred to other real estate owned.

All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (five monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated. When the foreclosed property has been legally assigned to the Corporation, a charge-off is taken with the remaining balance reflecting the fair value less estimated costs to sell transferred to other real estate owned.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when (i) principal or interest has been in default for a period of 90 days or more or (ii) full payment of principal and interest is not expected. Loans may be placed o n non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (three to six months) of repayment performance by the borrower. The Corporation had two loans that were 90 days or more past due that were not included in nonaccrual loans as of June 30, 2014. The aggregate amount of these loans at June 30, 2014 was $70. The Corporation had no loans that were 90 days or more past due that were not included in nonaccrual loans as of December 31, 2013.

All dollar amounts are reported in thousands except share and per share data.

The following tables provide details regarding the aging of the Corporation’s loan portfolio as of June 30, 2014 and December 31, 2013:

			90 Days and
	30 - 89 Days		Greater Past			Total Past
June 30, 2014	Past Due		Due			Due		Current	Total Loans
Retail:
Consumer	$	92	$	-	$	92	$	9,894	$	9,986
Single family residential		1,294		651		1,945		220,211		222,156
Other retail		-		-		-		29,022		29,022
Retail total		1,386		651		2,037		259,127		261,164
Commercial:
Commercial and industrial		716		1,225		1,941		87,049		88,990
Non-farm, non-residential real estate		258		236		494		171,406		171,900
Construction and development		-		-		-		40,955		40,955
Commercial loans secured by real est		28		173		201		32,048		32,249
All other commercial		468		1,170		1,638		21,791		23,429
Commercial total		1,470		2,804		4,274		353,249		357,523
Total	$	2,856	$	3,455	$	6,311	$	612,376	$	618,687
			90 Days and
	30 - 89 Days		Greater Past			Total Past
December 31, 2013	Past Due		Due			Due		Current	Total Loans
Retail
Consumer loans	$	182	$	3	$	185	$	10,772	$	10,957
Single family residential		3,805		83		3,876		209,887		213,763
Other retail		319		28		359		27,312		27,671
Retail total		4,306		114		4,420		247,971		252,391
Commercial
Commercial and industrial		428		1,328		1,756		92,946		94,702
Non-farm, non-residential real estate		393		-		393		175,820		176,213
Construction and development		-		28		28		29,910		29,938
Commercial loans secured by real est		38		178		216		26,724		26,940
Other commercial		-		1,249		1,249		25,333		26,582
Commercial total		859		2,783		3,642		350,733		354,375
Total	$	5,165	$	2,897	$	8,062	$	598,704	$	606,766

All dollar amounts are reported in thousands except share and per share data.

The following tables summarize the impaired loans by loan type as of June 30, 2014, December 31, 2013 and June 30, 2013:

													Average Recorded
													Investment
	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded			Related		Quarter To		Year To		Interest
June 30, 2014	Balance		Allowance		Allowance		Investment			Allowance		Date			Date	Received
Commercial:
Commercial and industrial	$	2,847	$	1,995	$	226	$		2,221	$	14	$	2,247	$	2,267	$	28
Non-farm, non-residential real est		9,994		3,998		5,425			9,423		1,217		9,533		9,650		245
Construction and development		250		250		-			250		-		250		282		8
Other commercial		3,392		2,801		173			2,974		29		3,040		3,151		104
Commercial total		16,483		9,044		5,824			14,868		1,260		15,070		15,350		385
Retail:
Single family residential		1,270		429		728			1,157		118		1,163		1,171		26
Other retail		-		-		-			-		-		-		-		-
Retail total		1,270		429		728			1,157		118		1,163		1,171		26
Total	$	17,753	$	9,473	$	6,552	$	16,025		$	1,378	$	16,233	$	16,521	$	411
													Average Recorded
													Investment
		Unpaid	Recorded		Recorded
	Contractual		Investment		Investment		Total
		Principal		With No	With		Recorded			Related		Quarter To		Year To		Interest
December 31, 2013		Balance	Allowance		Allowance		Investment			Allowance		Date			Date	Received
Commercial:
Commercial and industrial	$	2,190	$	1,338	$	234	$		1,572	$	16	$	1,585	$	1,620	$	23
Non-farm, non-residential real est		3,236		1,155		1,551			2,706		282		2,728		2,819		157
Construction and development		461		461		-			461		44		476		556		30
Other commercial		3,834		3,310		178			3,488		-		3,486		3,704		225
Commercial total		9,721		6,264		1,963			8,227		342		8,275		8,699		435
Retail:
Single family residential		1,121		568		419			987		118		935		1,044		52
Other retail		11		-		11			11		11		5		11		-
Retail total		1,132		568		430			998		129		940		1,055		52
Total	$	10,853	$	6,832	$	2,393	$		9,225	$	471	$	9,215	$	9,754	$	487
													Average Recorded
													Investment
	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded			Related		Quarter To		Year To		Interest
June 30, 2013	Balance		Allowance		Allowance		Investment			Allowance		Date			Date	Received
Commercial:
Commercial and industrial	$	2,225	$	1,394	$	229	$		1,623	$	34	$	1,631	$	1,642	$	10
Non-farm, non-residential real est		3,282		1,681		1,125			2,806		285		2,832		2,862		76
Construction and development		492		325		167			492		62		618		729		17
Other commercial		3,771		3,382		184			3,566		83		3,569		3,639		97
Commercial total		9,770		6,782		1,705			8,487		464		8,650		8,872		200
Retail:
Single family residential		1,060		187		716			903		172		983		1,010		27
Retail total		1,060		187		716			903		172		983		1,010		27
Total	$	10,830	$	6,969	$	2,421	$		9,390	$	636	$	9,633	$	9,882	$	227

All dollar amounts are reported in thousands except share and per share data.

The following table summarizes the nonaccrual loans by loan type as of June 30, 2014 and December 31, 2013:

		June 30,	December 31,
		2014	2013
Retail:
Consumer	$	15	$	21
Single family residential		2,124		1,667
Retail total		2,139		1,688
Commercial:
Commercial and industrial		1,734		1,649
Nonfarm, nonresidential		5,234		737
Construction and development		-		68
Commercial real estate		191		6
Other commercial		1,170		1,248
Commercial total		8,329		3,708
Total	$	10,468	$	5,396

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Troubled Debt Restructurings. Included in certain categories of impaired loans are certain loans that have been modified in a troubled debt restructuring where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified as a result of financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

When the Corporation modifies loans in a troubled debt restructuring, the Corporation evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If the Corporation determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Corporation evaluates all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance. There were no troubled debt restructurings that subsequently defaulted during the six months ended June 30, 2014 and 2013.

All dollar amounts are reported in thousands except share and per share data.

Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three and six months ended June 30, 2014, 2013 and the year ended December 31, 2013:

		Three months ended June 30, 2014
					Post-
					modification		Net charge-offs
	Number				outstanding		resulting from
	of loans				balance		modifications
Commercial:
Nonfarm nonresidential	1			$	4,357	$	-
Total troubled debt restructurings	1			$	4,357	$	-
			Six months ended June 30, 2014
					Post-
					modification		Net charge-offs
	Number				outstanding		resulting from
	of loans				balance		modifications
Commercial:
Nonfarm nonresidential	1			$	4,357	$	-
Total troubled debt restructurings	1			$	4,357	$	-
			Year ended December 31, 2013
					Post-
					modification		Net charge-offs
	Number				outstanding		resulting from
	of loans				balance		modifications
Retail:
Consumer	3			$	8	$	-
Single family residential	3				167		6
Total troubled debt restructurings	6			$	175	$	6
			Three months ended June 30, 2013
					Post-
					modification		Net charge-offs
	Number				outstanding		resulting from
	of loans				balance		modifications
Retail:
Consumer	2			$	4	$	-
Single family residential	1				36		5
Total troubled debt restructurings	3			$	40	$	5

All dollar amounts are reported in thousands except share and per share data.

		Six months ended June 30, 2013
				Post-
				modification		Net charge-offs
	Number			outstanding		resulting from
	of loans			balance		modifications
Retail:
Consumer	2		$	4	$	-
Single family residential	2			168		5
Total troubled debt restructurings	4		$	172	$	5

Loans retain their accrual status at the time of their modification. As a result, if a loan is on non-accrual status at the time it is modified, it stays as non-accrual status, and if a loan is on accrual status at the time of the modification, it generally stays on accrual status. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan and lease losses (“ALLL”) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. The Corporation considers a loan in default when it is 90 days or more past due and still accruing or transferred to nonaccrual status.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Corporation’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) non-performing loans and (v) the general economic conditions in the State of Tennessee.

The Corporation uses a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 through 8. A description of the general characteristics of the eight risk grades is as follows:

Risk Rating 1 Minimal Risk

General Characteristics:

Substantially risk free.
Federal, state, or municipal subdivisions with acceptable investment grade credit rating.
Large national, regional, or local entity with proven access to capital markets.
Diversity in borrower’s line of business with stable and diversified sales base.
Borrower is considered to be an industry leader with many consecutive years of strong profits and exhibits a financial condition, equity position, liquidity, and debt service capacity far exceeding industry norms.
Borrower has an abundance of unpledged financeable assets coupled with superior cash generation capabilities.
Industry conditions and trends are positive and strong.
Borrower has strong management with evidence of management succession.
A credit rating by Moody’s, Standard & Poor’s, or other qualified rating agency that is grade A or higher.
A cash secured loan with the cash on deposit in the Corporation or a guaranty from the federal government also warrants this risk rating.

Risk Rating 2 Modest Risk

General Characteristics:

Borrower shows strong profitability, liquidity, and capitalization better than industry norms and a strong market position in the region.
Borrower may have limited access to public markets for short-term needs or capital requirements, but has ready access to alternative financing.
Loans may be unsecured based on the financial strength of the borrower or secured by collateral that is considered liquid and marketable.
Borrower has a proven history of profitability and financial stability.

All dollar amounts are reported in thousands except share and per share data.

Borrower has a strong market position in its industry and has an abundance of financeable assets available to protect the Corporation’s position.
Borrower has proven and steady management with good management succession.
Borrower can withstand major market instabilities of short duration.
Credit rating by Moody’s, Standard & Poor’s, or other qualified rating agency that is grade BAA or higher.

Risk Rating 3 Average Risk

General Characteristics:

Borrower shows a stable earnings history and financial condition in line with industry norms with indications that these trends will continue.
The credit extension is considered sound; however, elements may be present which suggest the borrower may not be free from temporary impairments in the future.
Borrower’s liquidity and leverage is in line with industry norms.
Borrower has good management with acceptable management succession.
Under most economic and business conditions, borrower has access to alternative financing but limited or no access to capital markets for short-term or capital needs.
Borrower may be an individual with a sound financial condition and liquidity with proven historical income to repay the debt as scheduled.
Credit extensions are generally secured by acceptable collateral.

Risk Rating 4 Acceptable Risk

General Characteristics:

Credit is to a borrower with smaller margins of debt service coverage and with some elements of reduced financial strength.
Borrower is generally in a lower average market position in its industry.
Borrower shows satisfactory asset quality and liquidity, good debt capacity and coverage, and good management in critical positions.
Borrower’s management is of unquestioned character but management succession may be questionable.
Borrower can obtain similar financing from other financial institutions.
Interim losses or moderately declining earnings trends may occur, but the borrower has sufficient strength and financial flexibility to offset these issues.
Credit may be to individuals with a moderately leveraged financial condition but with satisfactory liquidity and income to cover debt repayment requirements.
Business borrowers may have moderate leverage, but must have historically consistent cash flow to cover debt service and other operating needs.
Business borrowers may also have erratic or cyclical operating performances but should demonstrate strong equity positions to support these profitability swings.
Asset-based loans that have stabilized and proven performance with the financial capacity to provide for annual clean up may qualify for this rating.
Borrower has no access to capital markets but would be financeable by another financial institution or finance company.
Credit extensions are generally secured by acceptable collateral.

Risk Rating 5 Pass / Watch

General Characteristics:

Loans considered for this risk rating require a heightened level of supervision.

A) Transitional, Event Driven – This category of risk rated 5 loans captures responses to early warning signals from a relationship and, therefore, signifies a specific, event-driven, transitional credit grade. The event is generally something unplanned or unexpected such as a death, a disaster, the loss of a major client, product line, or key employee or the divorce, or health condition of the owner or key management person. This category may be used in transitional upgrades as well as transitional downgrades of credit relationships. Under these criteria, this category necessitates a plan of action to either upgrade the credit to a “Pass” rating (i.e., Risk Rating 1-4), downgrade the credit to a criticized asset, or exit the relationship within six months.

All dollar amounts are reported in thousands except share and per share data.

B) Ongoing Supervision Warranted – This category may also be utilized to identify loans having inherent characteristics which warrant more than the normal level of supervision. Loans meeting these criteria may include larger, more complex loans with unusual structures. Loans, which, due to structure or nature of the collateral require above average servicing, may also be considered for this risk rating. Unlike other criteria listed previously for this category, these particular characteristics tend not to be one-time or transitional in nature; therefore, these loans may be expected to remain in this risk rating category longer than six months. A loan might remain in this risk rating category for its life or until the characteristic warranting the rating can be eliminated or effectively mitigated.

Borrower may exhibit declining earnings, strained cash flow, increasing leverage, or weakening market positions that indicate a trend toward an unacceptable risk.
Borrower’s liquidity, leverage, and earnings performance is below or trending below industry norms.
Interim losses and other adverse trends may occur but not to the level that would impair the Corporation’s position.
Borrower may be a newly formed company or in a new line of business or may be an established business with new or unproven management. Borrower should be adequately capitalized, but may not yet have achieved stabilized cash flow.
Borrower generally has a small market position in its industry.
Borrower may be engaged in an industry that is experiencing an economic downturn or is particularly susceptible to uncontrollable external factors.
Borrower management is of good character although some management weakness may exist, including lack of depth or succession.
Borrower generally has limited additional debt capacity and modest coverage, and average or below-average asset quality, margins, and market share.
Borrower’s ability to obtain financing from other financial institutions may be impaired.
Credit to individuals with marginal financial condition and liquidity but with income still sufficient to service the debt.

Risk Rating 6 Special Mention

A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

General Characteristics:

Borrower’s cash flow may not be sufficient to fund anticipated cash needs.
Sufficient or modestly sufficient financeable assets are available to protect the Corporation’s position.
Adverse trends in borrower’s operations/profits or unbalanced position in borrower’s balance sheet but not to the point where repayment is in jeopardy.
Borrower generally shows limited liquidity or high leverage.
Borrower’s financial position is in the lower quartile of industry norms.
Borrower’s business exhibits a deteriorating market position in the industry.
Borrower’s management lacks depth and succession.
Business is unable to withstand temporary setbacks without affecting repayment capability.
Borrower is not financeable by another bank but possibly by a finance company or specialized lender.

Risk Rating 7 Substandard

A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

General Characteristics:

The primary source of borrower’s repayment no longer provides satisfactory support and repayment is dependent on secondary sources.

All dollar amounts are reported in thousands except share and per share data.

A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.
Normal repayment from the borrower is impaired although no loss of principal is envisioned.
A partial loss of interest or principal will occur if the borrower’s deficiencies are not corrected.
Borrower’s cash flow is generally not sufficient to fund anticipated cash needs.
Borrower’s financeable assets may not be sufficient to protect the Corporation’s position.
Adverse trends in borrower’s operations that jeopardized debt repayment may require the borrower to undertake a significant reorganization of financing or the business.
Borrower shows poor liquidity and high leverage impairing the repayment of the debt in accordance with agreed upon terms.
Borrower’s management lacks depth and succession; may be inexperienced or of questionable character.
Borrower’s market position in the industry is deteriorating.
Borrower is not financeable by another bank or finance company.

Risk Rating 8 Doubtful

An asset classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

General Characteristics:

Inadequate primary source of repayment. Assumes a less than satisfactory secondary source of repayment on a most-likely case basis. There may be adequate secondary source of repayment on a best-case basis.
Borrower has the same weaknesses found in Substandard borrowers.
Loss probability is extremely high but because of certain important and reasonably specific factors that may work to strengthen the loan, its classification as an estimated loss is deferred until a more exact status may be determined.
Pending factors may include a proposed merger or acquisition; liquidation procedures; capital injections; perfecting liens on additional collateral; and refinancing plans.
Borrower’s cash flow is insufficient to fund cash needs.
Borrower’s financeable assets are insufficient to protect the Corporation’s position.
Borrower’s source of debt repayment is dependent on liquidation of assets with a probable loss.
Borrower may no longer be a going concern, or may not exist as a going concern for the foreseeable future.
No alternative financing sources exist for borrower.

All dollar amounts are reported in thousands except share and per share data.

The following tables present risk grades and classified loans by class of commercial loan in the Corporation’s portfolios as of June 30, 2014 and December 31, 2013:

June 30, 2014
							Commercial
							loans
Commercial loan portfolio:	Commercial		Non-farm, non-		Construction		secured by		All other
Credit risk profile by internally	and		residential real		and		residential		commercial		Commercial
assigned grade	industrial		estate loans		development		R/E		loans		loan totals
Pass	$	85,804	$	162,410	$	40,705	$	31,911	$	22,084	$	342,914
Special mention		175		996		-		-		175		1,346
Substandard		1,935		8,494		250		337		-		11,016
Doubtful		1,076		-		-		-		1,170		2,246
TOTALS	$	88,990	$	171,900	$	40,955	$	32,249	$	23,429	$	357,523
Retail loan portfolio: Credit
risk profiles based on	Consumer		Single-family		All other		Retail loan
delinquency status classification	loans		residential**		retail loans		totals
Performing	$	9,971	$	219,306	$	28,945	$	258,222
Non-performing*		15		2,850		77		2,942
TOTALS	$	9,986	$	222,156	$	29,022	$	261,164

*Loans are classified as non-performing loans and are automatically placed on non-accrual status once they reach 90 days past due. For the purposes of this calculation,

**Single-family residential loans includes first mortgages, closed-end second mortgages, residential construction loans, and home equity lines of credit (HELOC's).

December 31, 2013
							Commercial
							loans
Commercial loan portfolio:	Commercial		Non-farm, non-		Construction		secured by		All other
Credit risk profile by internally	and		residential real		and		residential		commercial		Commercial
assigned grade	industrial		estate loans		development		R/E		loans		loan totals
Pass	$	92,155	$	170,585	$	29,463	$	26,516	$	24,131	$	342,850
Special mention		836		3,883		-		-		179		4,898
Substandard		635		1,745		475		424		1,023		4,302
Doubtful		1,076		-		-		-		1,249		2,325
TOTALS	$	94,702	$	176,213	$	29,938	$	26,940	$	26,582	$	354,375
Retail loan portfolio: Credit
risk profiles based on	Consumer		Single-family		All other		Retail loan
delinquency status classification	loans		residential**		retail loans		totals
Performing	$	10,936	$	212,096	$	27,643	$	250,675
Non-performing*		21		1,667		28		1,716
TOTALS	$	10,957	$	213,763	$	27,671	$	252,391

*Loans are classified as non-performing loans and are automatically placed on non-accrual status once they reach 90 days past due. For the purposes of this calculation,

**Single-family residential loans includes first mortgages, closed-end second mortgages, residential construction loans, and home equity lines of credit (HELOC's).

All dollar amounts are reported in thousands except share and per share data.

Allowance for Loan and Lease Losses. The allowance for loan and lease losses “ALLL” is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Corporation’s ALLL methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” (“ASC Topic 310”), and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies” (“ASC Topic 450”). Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Corporation’s process for determining the appropriate level of the ALLL is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. Therefore, the amount of the provision reflects not only the necessary increases in the ALLL related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including, among other things, the performance of the Corporation’s loan portfolio, the economy, and changes in interest.

The Corporation’s ALLL consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has an assigned risk rating of 8 (Doubtful) or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the ALLL to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Corporation calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated quarterly based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and average balance of the loans in the pool. The Corporation’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

The components of the general valuation allowance include (i) the additional reserves allocated to specific loan portfolio segments as a result of applying an environmental risk adjustment factor to the base historical loss allocation and (ii) the additional reserves that are not allocated to specific loan portfolio segments including allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.

There is an inherent imprecision in calculating the specific portion of the ALLL. Therefore, a factor has been added to the allocation of each of the identified segments of the loan portfolio to account for the imprecision.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

All dollar amounts are reported in thousands except share and per share data.

The ALLL is maintained at a level considered adequate to provide for the losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.

The following tables summarize the allocation in the ALLL by loan segment for the six months ended June 30, 2014 and June 30, 2013 and the year ended December 31, 2013:

				Residential		Consumer and
	Commercial			real estate			other retail			Totals
Beginning ALLL balance - 3/31/14	$	7,373		$	1,085		$	163	$	8,621
Less: Charge-offs		-			(4)			(6)		(10)
Add: Recoveries		22			1			1		24
Add: Provisions		-			-			-		-
Ending ALLL balance - 6/30/14	$	7,395		$	1,082		$	158	$	8,635
				Residential		Consumer and
	Commercial			real estate			other retail			Totals
Beginning ALLL balance - 12/31/13	$	7,359	$		1,084	$		152	$	8,595
Less: Charge-offs		-			(4)			(6)		(10)
Add: Recoveries		36			2			12		50
Add: Provisions		-			-			-		-
Ending ALLL balance - 6/30/14	$	7,395		$	1,082		$	158	$	8,635
				Residential		Consumer and
	Commercial			real estate			other retail			Totals
Beginning ALLL balance - 3/31/13	$	7,340	$		1,143	$		174	$	8,657
Less: Charge-offs		(1)			-			(1)		(2)
Add: Recoveries		3			4			-		7
Add: Provisions		(179)			158			21		-
Ending ALLL balance - 6/30/13	$	7,163		$	1,305		$	194	$	8,662
				Residential		Consumer and
	Commercial			real estate			other retail			Totals
Beginning ALLL balance -12/31/12	$	7,528		$	1,109	$		172	$	8,809
Less: Charge-offs		(145)			(12)			(15)		(172)
Add: Recoveries		13			4			8		25
Add: Provisions		(233)			204			29		-
Ending ALLL balance -6/30/13	$	7,163		$	1,305		$	194	$	8,662

All dollar amounts are reported in thousands except share and per share data.

`			Residential		Consumer and
	Commercial		real estate			other retail			Totals
Beginning ALLL balance - 1/1/13	$	7,528	$	1,109		$	172	$	8,809
Less: Charge-offs		(222)		(27)			(49)		(298)
Add: Recoveries		53		2			29		84
Add: Provisions		-		-			-		-
Ending ALLL balance - 12/31/13	$	7,359	$	1,084		$	152	$	8,595

The following tables detail the amount of the ALLL allocated to each portfolio segment as of June 30, 2014, December 31, 2013 and June 30, 2013, disaggregated on the basis of the Corporation’s impairment methodology:

			Residential		Consumer and
June 30, 2014	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	1,260	$	118	$	-	$	1,378
Loans collectively evaluated for impairment		6,135		964		158		7,257
Total	$	7,395	$	1,082	$	158	$	8,635
			Residential		Consumer and
December 31, 2013	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	342	$	118	$	11	$	471
Loans collectively evaluated for impairment		7,017		966		141		8,124
Total	$	7,359	$	1,084	$	152	$	8,595
			Residential		Consumer and
June 30, 2013	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	464	$	172	$	-	$	636
Loans collectively evaluated for impairment		6,699		1,133		194		8,026
Total	$	7,163	$	1,305	$	194	$	8,662

All dollar amounts are reported in thousands except share and per share data.

The following tables show loans related to each balance in the ALLL by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology:

			Residential		Consumer and
June 30, 2014	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	14,868	$	1,157	$	-	$	16,025
Loans collectively evaluated for impairment		342,655		220,999		39,008		602,662
Ending Balance	$	357,523	$	222,156	$	39,008	$	618,687
`			Residential		Consumer and
December 31, 2013	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	8,227	$	987	$	11	$	9,225
Loans collectively evaluated for impairment		346,148		212,776		38,617		597,541
Ending Balance	$	354,375	$	213,763	$	38,628	$	606,766
			Residential		Consumer and
June 30, 2013	Commercial		real estate		other retail			Totals
Loans individually evaluated for impairment	$	8,487	$	903	$	-	$	9,390
Loans collectively evaluated for impairment		335,941		197,624		36,646		570,211
Ending Balance	$	344,428	$	198,527	$	36,646	$	579,601

NOTE 6 – BORROWED FUNDS

The Corporation has a Cash Management Advance Line of Credit Agreement (the “CMA”), dated June 21, 2010, with the FHLB. The CMA is a component of the Blanket Agreement for Advances and Security Agreement, dated June 20, 2006 (“Blanket Agreement”), with the FHLB of Cincinnati. The purpose of the CMA is to assist with short-term liquidity management. Under the terms of the CMA, the Corporation may borrow a maximum of $40 million, selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. There were no borrowings outstanding under the CMA as of June 30, 2014 or December 31, 2013.

NOTE 7 – POST-RETIREMENT BENEFIT PLAN

		Six months ended
		June 30, 2014		June 30, 2013
Service cost	$	16	$	86
Interest cost		56		240
Amortization of net gain		(97)		47
Net periodic cost	$	(26)	$	373

		Three months ended
		June 30, 2014		June 30, 2013
Service cost	$	8	$	51
Interest cost		28		167
Amortization of net gain		(50)		-
Net periodic cost	$	(14)	$	218

The Corporation contributed $15 and $111 to the plan for the six month periods ending June 30, 2014 and 2013, respectively.

All dollar amounts are reported in thousands except share and per share data.

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2014-04, “Troubled Debt Restructurings by Creditors (Topic 310).” ASU 2014-04 applies to all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The update requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 requires two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, with repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. For public business entities, the accounting changes and disclosure for certain transactions accounted for as a sale are effective for the first period beginning after December 15, 2014. The disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and for interim periods after March 15, 2015. The new standard is not expected to have a significant impact on the Corporation’s financial statements.

All dollar amounts are reported in thousands except share and per share data.

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “could,” “would,” “expect,” “believe,” “intend,” “may,” “will,” “can,” or “should” or future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Corporation’s valuation methodologies, contributions to the Corporation’s post-retirement benefit plan and returns on the plan’s assets, characterization of accrual and non-accrual loans, concessions granted for troubled debt restructurings, impairment of securities, repayment of loans, loan portfolio concentrations, fair value of impaired loans, satisfaction of capital adequacy requirements, risk rating classifications of loans, calculation of our ALLL, adequacy of traditional sources of cash generated from operating activities to meet liquidity needs, the impact of various factors on net interest income, the realization of deferred income tax assets, and the impact of remediation efforts concerning internal control over financial reporting. We caution you not to place undue reliance on such forward-looking statements in this report because results could differ materially from those anticipated due to a variety of factors. These factors include, but are not limited to, conditions in the financial market, liquidity, the sufficiency of our ALLL, economic conditions in the communities in the State of Tennessee where the Corporation does business, the impact of government regulation and supervision, interest rate risk, including changes in monetary policy and fluctuating interest rates, the Corporation’s ability to attract and retain key personnel, competition from other financial services providers, recent legislation and regulations impacting service fees, the Corporation’s ability to pay dividends, the availability of additional capital on favorable terms, the Corporation’s ability to adapt its products and services to evolving industry standards and consumer preferences, security breaches and other disruptions and other factors detailed from time to time in our filings with the Securities and Exchange ommission (the “SEC”). We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this report.

EXECUTIVE OVERVIEW

At June 30, 2014, the consolidated total assets of the Corporation were $1,114,973, its consolidated gross loans were $618,687, its total deposits were $966,883 and its total shareholders’ equity was $109,312. The Corporation’s loan portfolio at June 30, 2014 reflected an increase of $11,921, or 2.0%, compared to December 31, 2013. Total deposits increased $9,546, or 1.0%, and shareholders’ equity increased by 6.5% during the first six months of 2014.

Securities

Available-for-sale securities are an integral part of the asset/liability management process of the Corporation. Accordingly, they represent an important source of liquidity available to fund loans and accommodate asset reallocation strategies dictated by changes in the Corporation’s operating and tax plans, shifting yield spread relationships and changes in configuration of the yield curve. At June 30, 2014, the Corporation’s investment securities portfolio had $365,017 of available-for-sale securities, which are valued at fair market value, and $23,902 of held-to-maturity securities, which are valued at cost on the balance sheet. These compare to $329,714 of available-for-sale securities and $27,839 of held-to-maturity securities as of December 31, 2013.

Loans and Loan Losses

The loan portfolio is the largest component of earning assets for the Corporation and, consequently, provides the largest amount of revenue for the Corporation. The loan portfolio also contains the highest exposure to risk as a result of the possibility of unexpected deterioration in the credit quality of borrowers. When analyzing potential loans, management of the Corporation assesses both interest rate objectives and credit quality objectives in determining whether to make a given loan and the appropriate pricing for that loan. All 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 borrowers. The goal of the Corporation is to diversify loans to avoid a concentration of credit in a specific industry, person, entity, product, service, or any area vulnerable to a tax law change or an economic event.

Loan volume increased in the second quarter of 2014, resulting in total loans increasing by $11,921, or 2.0% during the six-month period ended June 30, 2014 as compared to the six month period ended June 30, 2013. Commercial loans increased by $3,148, or 0.9%, in the second quarter, and the retail portfolio increased by $8,773, or 3.5%. At $618,687, total loans outstanding increased by $39,086, or 6.7%, at June 30, 2014 compared to December 31, 2013. Loan demand has shown an improvement during the six months ended June 30, 2014, especially in the construction and development portfolio.

All dollar amounts are reported in thousands except share and per share data.

Loans identified with losses by management are promptly charged off. Furthermore, consumer loan accounts are charged off automatically based on regulatory requirements.

The ALLL is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Corporation’s ALLL methodology includes allowance allocations calculated in accordance with ASC Topic 310 and ASC Topic 450. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Corporation’s process for determining the appropriate level of the ALLL is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the ALLL related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. See Note 5 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report for further details regarding the Corporation’s methodology for estimating the appropriate level of the ALLL.

Collectability. A formal process is in place to enhance control over the underwriting of loans and to monitor loan collectability. This process includes education and training of personnel about the Corporation’s loan policies and procedures, assignment of credit analysts to support lenders, timely identification of loans with adverse characteristics, control of corrective actions and objective monitoring of loan reviews. The Corporation’s Special Assets Department identifies and monitors assets that need special attention. At June 30, 2014, this process identified loans totaling $1,346 that were classified as other assets especially mentioned compared to loans totaling $4,898 at December 31, 2013. Loans totaling $11,016 were classified as substandard at June 30, 2014, compared to loans totaling $4,302 at December 31, 2013. Loans totaling $2,246 were classified as doubtful at June 30, 2014, compared to loans totaling $2,325 at December 31, 2013.

Loans having a recorded balance of $16,025 and $9,225 at June 30, 2014 and December 31, 2013, respectively, have been identified as impaired. Nonaccrual loans amounting to $10,468 and $5,396 at June 30, 2014 and December 31, 2013, respectively, were not accruing interest. The large increase in impaired and nonaccrual loans is primarily related to one commercial real estate credit with an outstanding balance of approximately $4.4 million in which events occurred to cause the loan to be downgraded during the first quarter, as management concluded the timing and amounts of future cash flows cannot be reasonably estimated. A specific reserve of approximately $1.1 million was applied to this loan. In the second quarter of 2014, there was another large commercial credit downgraded, adding approximately $3.5 million to impaired loans.

Deposits

The Corporation does not have any foreign offices and all deposits are serviced in its 18 domestic offices. The Corporation’s average deposits increased 3.2% during the first six months of 2014 compared to an increase of 5.5% in the first six months of 2013. Average total noninterest-bearing deposits were 18.5% of total deposits at June 30, 2014, contributing to the Corporation’s low cost of deposits, compared to 17.6% at December 31, 2013.

Regulatory Requirements for Capital

The Corporation and First Farmers and Merchants Bank, the Corporation’s sole direct subsidiary (the “Bank”), are subject to federal regulatory capital adequacy standards. Failure to meet capital adequacy requirements could result in certain mandatory, and possibly additional discretionary, actions by regulators that could have a direct material adverse effect on the financial condition of the Corporation and the Bank. Federal regulations require the Corporation and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Under federal regulatory standards, to be “well-capitalized,” the Corporation’s and the Bank’s Tier 1 Risk-Based Capital Ratio (ratio of Tier 1 Capital to risk-weighted assets) must be at least 6%, its Total Risk-Based Capital Ratio (ratio of total capital to risk-weighted assets) must be at least 10%, and its Tier 1 Leverage Capital Ratio (ratio of Tier 1 Capital to average assets) must be at least 5%. Equity capital (net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries and certain classes of preferred stock) and other certain equity like instruments are considered Tier 1 Capital. Tier 2 Capital consists of core capital plus supplementary or temporary capital such as subordinated debt, some types of preferred stock, and a defined percentage of the ALLL.

All dollar amounts are reported in thousands except share and per share data.

As of June 30, 2014, the Bank’s Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Tier 1 Leverage Capital Ratios were 13.9%, 15.1%, and 9.0%, respectively, compared to 13.8%, 15.0%, and 9.1% at December 31, 2013. At June 30, 2014, the Corporation’s Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Tier 1 Leverage Capital Ratios were 14.3%, 15.5% and 9.3%, respectively, compared to 14.1%, 15.3%, and 9.4% at December 31, 2013. Management believes, as of June 30, 2014, that the Corporation and the Bank each met all capital adequacy requirements to which they are subject.

LIQUIDITY AND CAPITAL RESOURCES

Most of the capital needs of the Corporation historically have been met with retained earnings.

The Corporation and the Bank are subject to Tennessee statutes and regulations that impose restrictions on the amount of dividends that may be declared. Furthermore, any dividend payments are subject to the continuing ability of the Corporation to maintain its compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution. The Corporation’s Board of Directors has adopted a liquidity policy that outlines specific liquidity target balances. Compliance with this policy is reviewed quarterly by the Corporation’s Asset/Liability Committee and results are reported to the Corporation’s Board of Directors.

The Corporation’s formal asset and liability management process is used to manage interest rate risk and assist management in maintaining reasonable stability in the gross interest margin as a result of changes in the level of interest rates and/or the spread relationships among interest rates. The Corporation uses an earnings simulation model to evaluate the impact of different interest rate scenarios on the gross margin. Each quarter, the Corporation’s Asset/Liability Committee monitors the relationship of rate sensitive earning assets to rate sensitive interest-bearing liabilities (interest rate sensitivity), which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest bearing liabilities are financial instruments that can be re-priced to current market rates within a defined time period.

Management believes that the Corporation’s traditional sources of cash generated from operating activities are adequate to meet the liquidity needs for normal ongoing operations; however, the Corporation also has access to additional liquidity, if necessary, through additional advances from the FHLB or the CMA with the FHLB. The borrowings from the FHLB have been used generally for investment strategies to enhance the Corporation’s portfolio. At June 30, 2014, the Corporation had $40,000 borrowing capacity.

CRITICAL ACCOUNTING POLICIES

The accounting principles the Corporation follows and the methods of applying these principles conform with GAAP and with general practices within the banking industry. In connection with the application of those principles, the Corporation’s management has made judgments and estimates that with respect to the determination of the ALLL and the recognition of deferred income tax assets, have been critical to the determination of the Corporation’s financial position, results of operations and cash flows.

Allowance for Loan and Lease Losses

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

These calculated amounts are determined by assessing loans identified as not in compliance with loan agreements. These loans are generally in two different risk groups. One group is unique loans (commercial loans, including those loans considered impaired). The second group consists of pools of homogenous loans (generally retail and mortgage loans). The calculation for unique loans is based primarily on risk rating grades assigned to each of these loans as a result of the Corporation’s loan management and review processes. Each risk-rating grade is assigned a loss ratio, which is determined based on the experience of management, discussions with banking regulators and the independent loan review process. The amount allocated for an impaired loan is based on estimated cash flows discounted at the loan’s original effective interest rate or the underlying collateral value. Historical data, including actual loss experience on specific types of homogenous loans, is used to allocate amounts for loans or groups of loans

All dollar amounts are reported in thousands except share and per share data.

meeting the specified criteria. Management has implemented procedures that give more detailed historical data by category of retail and consumer credit and performance characteristics to broaden the analysis and improve monitoring of potential credit risk.

Criteria considered and processes utilized in evaluating the adequacy of the ALLL are: ^Ÿ Portfolio quality trends;

Changes in the nature and volume of the portfolio;
Present and prospective economic and business conditions, locally and nationally;
Management review systems and board oversight, including external loan review processes;
Changes in credit policy, credit administration, portfolio management and procedures;
Changes in personnel, management and staff; and
Existence and effect of any concentrations of credit.

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

RESULTS OF OPERATIONS

Total interest income for the six months ended June 30, 2014 was $18,145 compared to $18,746 for the six months ended June 30, 2013. Interest and fees earned on loans and investments are the primary components of total interest income. Interest and fees earned on loans were $13,942, a decrease of $334 during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The lower interest rates for loans were the primary reason for the lower interest income. Interest earned on investment securities and other earning assets was $4,203, a decrease of $267, or 6.0%, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The decrease in interest earned on investment securities was primarily the result of the call or maturity of several higher yielding municipal bonds in the second quarter of 2014.

Total interest expense in the six months ended June 30, 2014 was $1,243, a decrease of $342, or 21.6%, compared to the six months ended June 30, 2013. The lower interest rates for certificates of deposits and public funds during the second quarter of 2014 were the primary reasons for the lower expense. As a policy, budgeted financial goals are monitored on a quarterly basis by the Corporation’s Asset/Liability Committee, which reviews the actual dollar change in net interest income for different interest rate movements. A negative dollar change in net interest income for a 12-month and 24-month period of less than 10.0% of net interest income given a 100 to 200 basis point shift in interest rates is considered an acceptable rate risk position. The rate risk analysis for the 24-month period beginning July 1, 2014 and ending June 30, 2016 showed a worst-case potential change to net interest income, in the very unlikely event of a negative 100 basis point shift in interest rates, of 9.5%, or a decrease in net interest income of $3,115 by the end of the period. In a more likely scenario, the rate risk analysis for the 24-month period beginning July 1, 2014 and ending June 30, 2016 showed a worst-case potential change to net interest income, in the event of a 200 basis point shift in interest rates, of 2.4%, or a decrease of $785 by the end of the period.

Net interest income of the Corporation 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.

The net interest margin, on a tax equivalent basis, at June 30, 2014, December, 31, 2013 and June 30, 2013, was 3.47%, 3.66% and 3.64%, respectively. The decline during the first six months of 2014 was in part caused by lower yield on earnings assets.

Overall, the Corporation has experienced continued declining charge-offs trends and improved credit quality ratios. As such, no additions were made to the provision for loan losses in the second quarter of 2014 and in the second quarter of 2013.

All dollar amounts are reported in thousands except share and per share data.

Noninterest income was $5,742, a decrease of $207, or 3.5%, during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The gain on sales of securities for the six months ended June 30, 2014 and 2013 was $547 and $829, respectively, which accounted for the majority of the decrease in noninterest income over the six-month period.

Noninterest expense, excluding the provision for loan losses, was $16,123 in the six months ended June 30, 2014, decrease of $139, or .1%, as compared to noninterest expense for the six months ended June 30, 2013.

Net income for the six months ended June 30, 2014 was $4,859 compared to $5,441 for the six months ended June 30, 2013. The Corporation earned $0.97 per share for the six months ended in June 30, 2014, compared to $1.06 per share for the six months ended June 30, 2013. The decrease is mostly because of a decrease in noninterest income.

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation 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 stand-by letters of credit. These 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 Corporation has in those financial instruments. Loan commitments are agreements to lend to a customer as long as there is not a violation of any condition established in the loan commitment contract. Stand-by letters of credit are conditional commitments issued by the Corporation 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 total outstanding balance of loan commitments and stand-by letters of credit in the normal course of business at June 30, 2014 were $138,664 and $7,646, respectively.

At June 30, 2014, the Corporation and the Bank did not have any off-balance sheet arrangements other than commitments to extend credit and stand-by letters of credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

During the six months ended June 30, 2014, there were no material changes in the quantitative and qualitative disclosures about market risk presented in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures.

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

(b) Changes in Internal Control Over Financial Reporting. There has been no change in the Corporation’s internal control over financial reporting that occurred during the second quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

All dollar amounts are reported in thousands except share and per share data.

PART II - OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes in the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information regarding purchases of the Corporation’s common stock made by the Corporation during the second quarter of 2014:

CORPORATION’S PURCHASES OF EQUITY SECURITIES

			Total Number of	Maximum Number (or
			Shares Purchased as	Approximate Dollar Value)
	Total Number		Part of Publicly	of Shares that May Yet Be
	of Shares	Average Price	Announced Plans or	Purchased Under the Plans
Period	Purchased	Paid per Share	Programs	or Programs
April 1 – April 30, 2014	––	––	––	––
May 1 – May 31, 2014	––	––	––	––
June 1 – June 30, 2014			––	––
	45,182*	$26.00
Total	45,182*	$26.00	––	––

*Purchased through negotiated transactions with several third-party sellers.

Item 6. Exhibits.

EXHIBIT
NUMBER	DESCRIPTION

3.1	Charter. (1)
3.2	Articles of Amendment to Charter. (1)
3.3	Second Amended and Restated By-laws. (2)
31.1	Certification of the Chief Executive Officer of First Farmers and Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Definition Linkbase Document.
101.LAB	XBRL Taxonomy Label Linkbase Document.
101.PRE XBRL	Taxonomy Presentation Linkbase Document.

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

(2) Incorporated by reference from the First Farmers and Merchants Corporation Annual Report on Form 10 -K, as filed with the Securities and Exchange Commission on March 15, 2011 (File Number 000-10972).

SIGNATURES

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

FIRST FARMERS AND MERCHANTS CORPORATION
(Registrant)

Date	August 11, 2014	/s/ T. Randy Stevens
		T. Randy Stevens, Chief Executive Officer


Date	August 11, 2014	/s/ Patricia P. Bearden
		Patricia P. Bearden, Treasurer (principal financial officer and principal
		accounting officer)

EXHIBIT
NUMBER	DESCRIPTION

3.1	Charter. (1)
3.2	Articles of Amendment to Charter. (1)
3.3	Second Amended and Restated By-laws. (2)
31.1	Certification of the Chief Executive Officer of First Farmers and Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Treasurer (principal financial officer) of First Farmers and Merchants Corporation Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of the Chief Executive Officer and Treasurer (principal financial officer) of First Farmers and Merchants Corporation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Definition Linkbase Document.
101.LAB	XBRL Taxonomy Label Linkbase Document.
101.PRE XBRL	Taxonomy Presentation Linkbase Document.

(2) Incorporated by reference from the First Farmers and Merchants Corporation Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 15, 2011 (File Number 000-10972).