10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 2013

or

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

For the transition period from ___________________________ to _______________________________________________

Commission file number         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)
Registrant’s telephone number, including area code  (931) 388-3145
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
None	None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $10.00 par value per share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[    ]Yes   [ X ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

[    ]Yes   [ X ] No

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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ X ]      

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 the 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 [    ]

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

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2013 was approximately $121,936,983 based on the reported price at which the common stock was last sold in a transaction known to the registrant.

As of March 1, 2014, the registrant had outstanding 5,021,012 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Annual Report to Shareholders for Fiscal Year Ended December 31, 2013 -- Part I and II of this Report.

Proxy Statement for 2014 Annual Shareholders’ Meeting to be held on April 15, 2014 -- Part III of this Report.

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PART I

Item 1. Business.

Description of Business

            First Farmers and Merchants Corporation (the “Corporation”) was incorporated on March 31, 1982 as a Tennessee corporation.  As of December 31, 2013, the only direct subsidiary of the Corporation was First Farmers and Merchants Bank, a Tennessee state-chartered bank (the “Bank”).  Management evaluates the financial condition of the Corporation in terms of the Bank’s operations within its service area in Middle Tennessee.

            The operations of the Bank are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies.  Lending activities are influenced by the general credit needs of small businesses in the Bank’s service area, competition among lenders, the level of interest rates and the availability of funds.  The Bank’s loan portfolio is comprised of commercial, commercial and residential real estate, and retail installment loans, which primarily originate within the Bank’s service area.  Deposits are the primary source of funds for the Bank.  Such deposits consist of checking accounts, regular savings deposits, negotiable order of withdrawal accounts, money market accounts and market rate certificates of deposit.  Deposits are solicited from individuals and businesses in the Bank’s service area, state and local entities and, to a lesser extent, United States government entities and other depository institutions.  Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Bank’s service area.  All of the Corporation’s assets are located in the United States and all of its revenues generated from external customers originate within the United States.

The Bank’s net income is dependent primarily on its net interest income, which is the difference between the interest income earned on its loans, investment assets and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities.  To a lesser extent, the Bank’s net income also is affected by its noninterest income derived principally from service fees as well as the level of noninterest expenses such as salaries and employee benefits.

For more information regarding the business of the Corporation and the Bank, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Corporation’s 2013 Annual Report to Shareholders (the “Annual Report to Shareholders”) attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Availability of SEC Reports

The Corporation’s website is www.myfirstfarmers.com. The Corporation makes available free of charge on this website under the “About Us - Investor Services” link the Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Corporation electronically files such materials with, or furnishes them to, the Securities and Exchange Commission (the “SEC”).  The SEC maintains a website at www.sec.gov that also contains reports, proxy and information statements and other information about the Corporation that are available free of charge.  In addition, copies of our reports are available, without charge, by making a request through the “Contact Us” link on our website.

Regulation and Supervision

In addition to the generally applicable state and federal laws governing businesses and employers, the Corporation is subject to extensive regulation by federal and state laws and regulations applicable to financial institutions and their parent companies. Nearly all aspects of the business of the Corporation are subject to specific requirements and restrictions and general regulatory oversight. The principal objectives of state and federal laws regulating financial institutions are the maintenance of the safety and soundness of the institutions and the federal deposit insurance system, and the protection of consumers or classes of consumers, rather than the specific protection of shareholders of a bank or the parent company of a bank, such as the Corporation. In addition, the supervision, regulation and examination of the Corporation by the bank regulatory agencies is not intended to protect the Corporation’s shareholders. Below is a brief summary of the regulatory environment in which the Corporation and its subsidiaries operate, but it is not designed to be a complete discussion of all statutes and regulations affecting the Corporation or its subsidiaries.

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The Corporation is a bank holding company regulated under the Bank Holding Company Act of 1956 (the “BHCA”) and is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Corporation is required to file various reports with, and is subject to examination by, the Federal Reserve. The Federal Reserve has the authority to issue orders to bank holding companies to cease and desist from unsound practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve. The Federal Reserve is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder.

The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless a bank holding company’s net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. The Bank is also subject to regulatory limitations on the amount of dividends it may declare and pay. This may limit income available to the Corporation, as the Corporation depends in part upon dividends received from the Bank to fund its activities, including the payment of dividends.

According to Federal Reserve policy and the Dodd-Frank Wall Street Reform and Protection Act of 2010 (the “Dodd-Frank Act”), a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when the bank holding company may not have the resources to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation (the “FDIC”) can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the “default” of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”

The Corporation owns the Bank, which is chartered under the laws of Tennessee and is a member of the Federal Reserve. The Bank is subject to extensive state regulation and examination by the Tennessee Department of Financial Institutions and the Federal Reserve as the primary regulators, and the FDIC as the secondary regulator that insures the deposits of all banks to the maximum extent permitted by law. The federal and state laws and regulations that are applicable to banks regulate, among other matters, the scope of the Bank’s business, the Bank’s investments, the Bank’s reserves against deposits, the timing of the availability of deposited funds and the amount of loans and the amount of interest that may be charged on loans. Various state consumer laws and regulations also affect the Bank’s operations.

The Corporation and the Bank are required to comply with capital guidelines issued by the Federal Reserve and with other tests related to capital adequacy that the Federal Reserve adopts from time to time.

The Basel Committee on Banking Supervision (the “Basel Committee”) has announced revised final frameworks, generally referred to as “Basel III,” for the regulation of capital and liquidity of internationally active banking organizations. Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments, like trust preferred securities, and change the risk weightings of assets used to determine required capital ratios. Basel III is presently the subject of notices of proposed rulemaking released in June 2012 by federal banking agencies. The comment period for these notices of proposed rulemaking ended on October 22, 2012. In July 2013, the Federal Reserve published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules implement the Basel Committee’s Basel III capital framework. The Basel III Capital Rules increase minimum requirements for both the quantity and the quality of capital held by banking organizations. The Basel III Capital Rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, and adjust the methodology for calculating risk-weighted assets to enhance risk sensitivity. Beginning January 1, 2015, the Corporation and the Bank must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the Basel III Capital Rules. Compliance with the risk-weighted asset calculations will be required on January 1, 2015. Management believes the Corporation’s and the Bank’s current capital ratios exceed those required under the Basel III Capital Rules.

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The Federal Community Reinvestment Act (the “CRA”) generally requires insured depository institutions to make loans and investments and provide services that meet the credit needs of the communities they serve. As a part of the CRA program, the Bank is subject to periodic examinations by the Federal Reserve and must maintain comprehensive records of its CRA activities. During these examinations, the Federal Reserve rates such institutions’ compliance with the CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” As of the last CRA examination on September 12, 2012, the Bank received an “Outstanding” rating from the Federal Reserve.

Pursuant to the authority granted under various statutes, the federal bank regulatory agencies have adopted guidelines (the “Guidelines”) for safekeeping confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program that has been approved by the Board of Directors of both the Bank and the Corporation.

The Bank is required to pay quarterly FDIC deposit insurance assessments to the Deposit Insurance Fund (“DIF”). The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervision rating.

The passage of the Dodd-Frank Act brought about a major overhaul of the current financial institution regulatory system. Among other things, the Dodd-Frank Act established the independent Consumer Financial Protection Bureau tasked with protecting consumers from unfair, deceptive and abusive financial products and practices. The Dodd-Frank Act required the implementation of the “Volcker Rule” for banks and bank holding companies, which prohibits with certain limited exceptions, proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and otherwise limit the relationships with such funds. The Dodd-Frank Act includes provisions that, among other things, reorganize bank supervision and strengthen the Federal Reserve. The Dodd-Frank Act also requires fees charged for debit card transactions, commonly referred to as interchange fees, to be both “reasonable and proportional” to the cost incurred by the card issuer.

Further, the Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. Prior to the implementation of the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk of such behavior to the financial institution. The Dodd-Frank Act provides other restrictions, including limiting the ability of financial institutions to utilize trust preferred securities as Tier 1 capital going forward, and requiring institutions to retain credit risk when selling loans to third parties.

            On July 31, 2010, the Federal Reserve implemented revised Regulation E. The effect of this revision was to allow customers of the Bank to opt out of overdraft protection programs, and thereby potentially reduce fee income generated by the Bank. The Bank has taken all steps necessary to be compliant with the revised Regulation E.

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The activities of the Corporation and the Bank are also subject to regulation under other various federal laws including the Gramm-Leach-Bliley Act of 1999, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism USA Patriot Act of 2001, the Truth-in-Lending Act, the Trust-in-Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, , the Home Mortgage Disclosure Act, the National Flood Insurance Act, the Real Estate Settlement Procedures Act, the Bank Secrecy Act, various laws and regulations prohibiting unfair, deceptive or abusive acts and practices, the Houston and Economic Recovery Act, the Fair Credit Reporting Act, the Fair Debt Collection Practice Act, the Electronic Funds Transfer Act and the Currency and Foreign Transactions Reporting Act, among others, as well as various state laws.

Competition

The business of providing financial services is highly competitive. In addition to competing with other commercial banks in the Bank’s service area, the Bank competes with savings and loan associations, insurance companies, savings banks, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations, credit unions and other enterprises. None of these competitors is dominant in the entire area served by the Bank.

In the Tennessee markets it serves, the Bank offers a typical mix of interest-bearing transaction, savings and time deposit products as well as traditional non-interest bearing deposit accounts.  The Bank’s primary market areas for these products are Dickson, Giles, Hickman, Lawrence, Marshall, Maury and Williamson Counties in Tennessee.  The Bank will be opening a new branch in Davidson County in 2014.

Employees

The Corporation has no employees.  The Bank had approximately 244 full-time employees and 26 part-time employees at December 31, 2013.  Four of the Bank’s officers are also officers of the Corporation.  Employee benefit programs provided by the Bank include a deferred profit-sharing plan, an annual profit-sharing plan, lender production incentives, a salary continuation plan, long-term disability insurance, a deferred compensation plan, an executive split-dollar life insurance plan, a post-retirement medical benefits program, a Section 125 cafeteria plan, training programs, group life and accidental death insurance, health and dental insurance and paid vacations.

Item 1A. Risk Factors.

An investment in our common stock involves significant risks.  The risks and uncertainties that management believes affect or could affect us are described below.  This listing should not be considered as all-inclusive.  You should carefully read and consider these risks and uncertainties described below together with all of the other information included or incorporated by reference in this report before you decide to invest in our common stock.  References to “we,” “us,” and “our” in this section refer to the Corporation and the Bank, unless otherwise specified or unless the context otherwise requires.

Our business and credit quality may be adversely affected by conditions in the financial market.

            Beginning in mid-2007, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the value of nearly all asset classes and by a serious lack of liquidity, and economic conditions affecting the banking industry have not since fully recovered.  The global markets have been characterized by substantially increased volatility and short-selling and an overall loss of investor confidence.

            Businesses continue to experience serious difficulties resulting from restrained consumer spending and the lack of credit market liquidity.  Market conditions have also led to the failure or merger of a number of prominent financial institutions and competition for deposits and high quality loans has increased for those that remain in business. 

            Overall, during 2013 the business environment continued to be unfavorable for many households and businesses in the United States and worldwide. Although the business environment in middle Tennessee has been better than in the United States generally, our customers continue to be impacted by reduced asset values, a tightening credit environment, securities market volatility and other factors. It is possible that the business environment in middle Tennessee, the United States and worldwide will continue to experience weakness and uncertainty for the foreseeable future. There can be no assurance that conditions will improve in the near term. Such conditions could adversely affect the credit quality of our loans, results of operations and financial condition.

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A reduction of customer deposits or an inability of our borrowers to repay loans could have a material adverse effect on our liquidity.

We rely on dividends from the Bank as our primary source of funds.  The primary sources of funds of the Bank are customer deposits and loan repayments.  While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.  The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability.  Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions.  Accordingly, we may be required from time to time to rely on secondary sources of liquidity, such as Federal Home Loan Bank advances, to meet withdrawal demands or otherwise fund operations.  While management believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.

Our allowance for loan losses may be insufficient, which could result in a reduction of net income and capital.

We maintain an allowance for loan and lease losses, which is a reserve established through a provision for loan and lease losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans and leases.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The level of the allowance reflects management’s continuing evaluation of:

• 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;

• changes in credit policy, credit administration, portfolio management and procedures;

• changes in personnel, management and staff; and

• the existence and effect of any concentrations of credit. 

The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes.  An increase in the allowance for loan and lease losses results in a decrease in net income, and possibly capital, and may have a material adverse effect on our financial condition and results of operations.  For further discussion related to our allowance for loan and lease losses, please refer to “Liquidity and Capital Resources – Loans and Loan Quality” and “Critical Accounting Policies – Allowance for Loan and Lease Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Our profitability depends significantly on economic conditions in the communities in the States of Tennessee where we do business.

Our success and profitability depend on the general economic conditions in the specific local markets in middle Tennessee where we do business.  Local economic conditions have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.  A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings.  Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. A significant decline in general economic conditions could impact local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.

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We are subject to extensive government regulation and supervision.

We are subject to extensive regulation and supervision under federal and state laws and regulations.  The restrictions imposed by such laws and regulations limit the manner in which we conduct business, undertake new investments and activities and obtain financing.  These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit our shareholders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Most recently, the Dodd-Frank Act has implemented sweeping reforms to the financial services industry. A number of provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies.  We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but management believes that certain aspects of the new legislation including, without limitation, the additional cost of higher deposit insurance and the costs of compliance with disclosure and reporting requirements and examinations by the new Consumer Financial Protection Agency, could have a significant impact on our business, financial condition and results of operations. Further, federal monetary policies, particularly as implemented through the Federal Reserve, significantly affect short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on our financial condition or results of operations.

It is possible that there will be continued changes to the banking and financial institutions regulatory regimes in the future. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.  We cannot predict the extent to which the government and governmental organizations may change any of these laws or controls.  We also cannot predict how such changes would adversely affect our business and prospects.

We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income.  Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.  Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our securities portfolio and other interest-earning rates received on loans and other investments, our net interest income, and therefore, earnings could be adversely affected.  Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.  For further discussion related to our management of interest rate risk, please refer to “Liquidity and Capital Resources – Interest Rate Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

We rely heavily on our management team and on our ability to attract and retain key personnel.

We are a customer-focused and relationship-driven organization.  Future growth is expected to be driven in large part by the relationships we maintain with our customers.  Additionally, it is important for us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services.  The market for such people is competitive and there is no assurance that we will be successful in attracting, hiring, motivating or retaining them.

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Competition from other financial services providers could adversely impact our results of operation.

The banking and financial services business is highly competitive.  We face competition in making loans, attracting deposits and providing trust services.  Increased competition in the banking and financial services business may reduce our market share, impair its growth or cause the prices we charge for our services to decline.  For further discussion related to our competition in our market area, please refer to “Competition” in Item 1 of this Annual Report on Form 10-K.

We obtain a significant portion of our noninterest revenue through service fees on deposit accounts; legislation and regulations impacting service fees could reduce our fee income.

A significant portion of our noninterest revenue is derived from service fee income. One of the components of this service fee income is overdraft-related fees. Management anticipates that changes in banking regulations, and in particular the Federal Reserve’s rules pertaining to certain overdraft payments on consumer accounts and the FDIC’s Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, will continue to have a significant adverse impact on our service fee income and overall results. Additionally, management anticipates that changes in customer behavior as well as increased competition from other financial institutions will result in declines in deposit accounts or in overdraft frequency resulting in a decline in service fee income. A reduction in deposit account fee income could have a material adverse effect on our earnings.

Our ability to declare and pay dividends is limited by law.

We derive our income primarily from dividends received from owning the Bank’s common stock. Federal and state law limit the Bank’s ability to declare and pay dividends. In addition, the Federal Reserve may impose restrictions on our ability to declare and pay dividends on our common stock. For further discussion related to restrictions on our ability to declare and pay dividends, please refer to “Regulation and Supervision” in Item 1 of this Annual Report on Form 10-K.

We may elect or be compelled to seek additional capital in the future, but that capital may not be available on favorable terms when it is needed.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance any acquisitions or we may otherwise elect or be required to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot provide assurance of our ability to raise additional capital if needed or to be able to do so on terms acceptable to us. If we cannot raise additional capital on favorable terms when needed, it may have a material adverse effect on our financial condition and results of operations.

Our common stock is not listed or traded on any established securities market and is normally less liquid than securities traded in those markets.

Our common stock is not listed or traded on any established securities market and there are no plans to seek to list our common stock on any recognized exchange. Accordingly, our common stock has substantially less daily trading volume than the average securities listed on any national securities exchange. Most transactions in our common stock are privately negotiated trades and the shares are very thinly traded. There is no dealer for our stock and no “market maker.” These factors can reduce the marketability of our shares and the lack of a liquid market can produce downward pressure on our stock price.

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Maintaining or increasing our market share may depend upon our ability to adapt our products and services to evolving industry standards and consumer preferences.

Our success depends, in part, on our ability to adapt our products and services as well as our distribution of them to evolving industry standards and consumer preferences. Payment methods have evolved with the advancement of technology, such as consumer use of smart phones and PayPal accounts to pay bills, thereby increasing competitive pressure in the delivery of financial products and services. The development and adoption by us of new technologies could require us to make substantial expenditures to modify our existing products and services. Further, we might not be successful in developing or introducing new products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, or sufficiently maintaining and growing a loyal customer base. Our inability to adapt to evolving industry standards and consumer preferences could have an adverse impact on our financial condition or results of operations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

            A failure of our operating systems or infrastructure, or those of our third-party vendors, could disrupt our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory standards. As processing demands change and our loan portfolios grow in both volume and differing terms and conditions, developing and maintaining our operating systems and infrastructure becomes increasingly challenging and there is no assurance that we can adequately or efficiently develop and maintain such systems.

            Our operations rely on the secure processing, storage and transmission of personal, confidential and other information in our computer systems and networks. Although we take protective measures, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond our control. If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through, our computer systems and networks could be jeopardized or could cause interruptions or malfunctions in our operations that could result in significant losses or reputational damage. We have put in place secure transmission capability, and work to ensure third parties follow similar procedures. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, regulatory action and reputational harm. In the event personal, confidential or other information is jeopardized, intercepted, misused or mishandled, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to fines, penalties, litigation costs and settlements and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Any of these events could have a material adverse effect on our business, financial condition or results of operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

At December 31, 2013, the Bank maintained a main office in Columbia, Tennessee, 17 other offices and 35 separate automatic teller or cash dispensing machine locations.  In addition to the main office in Columbia, the Bank’s 16 other offices are located in the following locations throughout Middle Tennessee:

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City	County	Offices
Bon Aqua	Hickman	1
Centerville	Hickman	1
Columbia	Maury	4
Franklin	Williamson	2
Lawrenceburg	Lawrence	2
Lewisburg	Marshall	1
Loretto	Lawrence	1
Mt. Pleasant	Maury	1
Pulaski	Giles	1
Spring Hill	Maury	2
White Bluff	Dickson	1
	Total:	17

The Bank’s office at S. James Campbell Boulevard, Columbia, Tennessee is located on property that is leased and the bank also leases space in a Kroger store in Columbia.  The Bank provides only automatic teller machine services at the following locations:

2223 Carmack Blvd (Quik Mart/Shell)	Columbia, TN
312 East James Campbell (QuickMart/Shell)	Columbia, TN
1120 Hampshire Pike (Quik Mart/Shell)	Columbia, TN
1517 Hampshire Pike (Quik Mart/Shell)	Columbia, TN
1224 Trobtwood Ave. (Maury Regional)	Columbia, TN
147 Bear Creek Pike (Farm Bureau)	Columbia, TN
2577 Nashville Highway (Quik Mart/Shell)	Columbia, TN
5414 Main Street (Quik Mart/Shell)	Spring Hill, TN
9170 new Lawrenceburg Highway (Quik Mart/Shell)	Mt. Pleasant, TN
121 2nd Ave. South	Lewisburg, TN
1748 Mooresville Rd (Shopping Center)	Lewisburg, TN
800 North Ellington Parkway(Quik Mart/Shell)	Lewisburg, TN
710 East Gaines  (Quik Mart/Shell)	Lawrenceburg, TN
2100 North Locust (Quik Mart/Shell)	Lawrenceburg, TN
1607 S. Locust Ave. (Crocket Hospital)	Lawrenceburg, TN
215 South Military(Quik Mart/Shell)	Loretto, TN

For more information on the properties owned and leased by the Corporation and the Bank, please refer to Notes 5 and 7 to the Consolidated Financial Statements, which are included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Item 3. Legal Proceedings.

The Corporation, the Bank and the subsidiaries of the Bank are, from time to time, subject to claims or suits arising in the ordinary course of business.  The Corporation, the Bank and the subsidiaries of the Bank currently are not a party to any legal proceeding that, in management’s opinion, would have a material adverse effect on the Corporation’s financial condition or results of operations.

Item 4.  Mine Safety Disclosures.

            Not applicable.

11

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

A discussion of the Corporation’s common stock and related shareholder matters is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to the Consolidated Financial Statements, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.  There were no sales of unregistered securities of the Corporation during the 12 months ended December 31, 2013. 

The following table provides information regarding purchases of the Corporation’s common stock made by the Corporation during the fourth quarter of 2013:

CORPORATION'S PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased *	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 – March 31, 2013	44,677	$23.00		$                        -
April 1 – June 30, 2013	46664	$23.00	-	$                        -
July 1 – September 30, 2013	34838	$23.00	-	$                        -
October 1, 2013 - December 31, 2013	32,810	$25.00	-	$                        -
Total	158,989	$23.50	-	$                        -

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

Item 6. Selected Financial Data.

The selected financial data, set forth in the Annual Report to Shareholders under the caption “Selected Financial Information,” is attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

A discussion of the market risk of the Corporation and the Bank as of December 31, 2013 related to the investment debt and equity securities held by the Corporation and the Bank is set forth in Note 2 to the Consolidated Financial Statements, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.  A discussion of the market risk in the loan portfolio of the Bank is set forth in Note 3 to the Consolidated Financial Statements and in the section entitled “Liquidity and Capital Resources – Loans and Loan Quality” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.  A discussion of the rate sensitivity of all earning assets and interest-bearing liabilities of the Corporation and the Bank is set forth in the section entitled “Liquidity and Capital Resources– Interest Rate Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference. 

12

Item 8. Financial Statements and Supplementary Data.

Financial statements and supplementary data are set forth in the Consolidated Financial Statements and Notes to Consolidated Financial Statements, each of which is included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K and is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness 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-15 and 15d-15 under the Securities and Exchange Act of 1934, as amended (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 the reports that the Corporation files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation has included a report of management’s assessment of the design and operating effectiveness of its internal controls as part of this report.  BKD, LLC, the independent registered public accounting firm that audited the Consolidated Financial Statements of the Corporation included in the Annual Report to Shareholders attached as Exhibit 13 to this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013.  The report, which expresses an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013, along with management’s report, are included with the Consolidated Financial Statements in the Annual Report to Shareholders under the captions “Management Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” each of which is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

            During the period ended December 31, 2013, management has been actively engaged in implementing a detailed plan and timetable to remediate a material weakness over financial reporting identified during the period ended December 31, 2012.  Remediation efforts included the following: expansion of the review process to include the CFO’s review of all significant transactions to ensure that all such transactions are identified and recorded properly, quarterly meetings by the Accounting Management committee to identify new accounting pronouncements and developments and determine the appropriate application to the Company’s financial reporting, and the Accounting Department’s maintenance of a monthly close log to serve as a transcript of the close process.   Management believes that efforts have effectively remediated the material weakness.  There are no other changes in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

13

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Reference is made to information in the Corporation’s Proxy Statement relating to the 2014 Annual Meeting of Shareholders (the “Proxy Statement”) under the captions “Proposal 1: Election of Directors,” “Executive Officers,” “Corporate Governance – Committees of the Board of Directors,” “Corporate Governance – Code of Ethics,” and “General Information – Section 16 (a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.

Item 11. Executive Compensation.

Reference is made to information in the Proxy Statement under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report,” which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Reference is made to information in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management,” which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Reference is made to information in the Proxy Statement under the captions “Corporate Governance – Director Independence” and “Related Person Transactions,” which information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

Reference is made to information in the Proxy Statement under the captions “Audit Committee Report” and “Independent Registered Public Accounting Firm,” which information is incorporated herein by reference. 

14

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a)		(1) Financial statements are set forth in the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.
	(2)	All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements referenced in Item 15(a)(1).
		(3) Exhibits:
3.1		Charter. (1)
3.2		Articles of Amendment to Charter. (1)
3.3		Second Amended and Restated Bylaws, as amended. (2)
4		Specimen Stock Certificate. (1)
10.1		Profit Sharing Plan. (3)*
10.2		First Amendment to Profit Sharing Plan. (3)*
10.3		Second Amendment to Profit Sharing Plan. (3)*
10.4		Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)*
10.5		Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Bank’s and the Corporation’s Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)*
10.6		Benefits Agreement by and between John P. Tomlinson, III, the Bank’s and Corporation’s Chief Administrative Officer, dated as of January 29, 2007. (4)*
10.7		Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)*
10.8		First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*
10.9		Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)*
10.10		First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)*
10.11		First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*
10.12		Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*
10.13		Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*
10.14		First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)*
10.15		First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

15

10.16	Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*
10.17	First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)*
10.18	Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)*
10.19	Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)*
10.20	First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*
10.21	First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*
10.22	Employment Agreement with Barry B. White, dated as of November 18, 2003. *
13	Annual Report to Shareholders.
21	List of Subsidiaries.
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	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013,   2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders’ Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

*          Indicates a compensatory plan or arrangement.

(1)        Incorporated by reference to 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 to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).

(3)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 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 July 19, 2004 (File Number 000-10972).

(4)        Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).

16

(5)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).

17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST FARMERS AND MERCHANTS CORPORATION

 By          /s/ T. Randy Stevens                                               

                T. Randy Stevens

                Chief Executive Officer  

                Date:  March 5, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s / PATRICIA P. BEARDEN	Treasurer, Chief Financial Officer	3/5/2014
Patricia P. Bearden
/s/ M. DARLENE BAXTER	Director	3/5/2014
M. Darlene Baxter
/s/ JONATHAN M. EDWARDS	Director	3/5/2014
Jonathan M. Edwards
/s/ TOM NAPIER GORDON	Director	3/5/2014
Tom Napier Gordon
/s/ DALTON M. MOUNGER	Director	3/5/2014
Dalton M. Mounger
/s/ TIMOTHY E. PETTUS	Director	3/5/2014
Timothy E. Pettus
/s/ PATRICK J. RILEY	Director	3/5/2014
Patrick J. Riley
/s/ MATTHEW M. SCOGGINS, JR.	Director	3/5/2014
Matthew M. Scoggins, Jr.
/s/ T. RANDY STEVENS, III	Director, Chief Executive Officer	3/5/2014
T. Randy Stevens, III	(principal executive officer)
/s/ W. LACY UPCHURCH	Director	3/5/2014
W. Lacy Upchurch
/s/ KIMBERLY VELLA	Director	3/5/2014
Kimberly Vella
/s/ DAVID S. WILLIAMS	Director	3/5/2014
David S. Williams

18

EXHIBIT INDEX

FIRST FARMERS AND MERCHANTS CORPORATION

3.1	Charter. (1)
3.2	Articles of Amendment to Charter. (1)
3.3	Second Amended and Restated Bylaws, as amended. (2)
4	Specimen Stock Certificate. (1)
10.1	Profit Sharing Plan. (3)*
10.2	First Amendment to Profit Sharing Plan. (3)*
10.3	Second Amendment to Profit Sharing Plan. (3)*
10.4	Executive Salary Continuation Agreement by and between First Farmers and Merchants National Bank and Waymon L. Hickman, dated as of December 1, 1992. (3)*
10.5	Benefits Agreement by and between First Farmers and Merchants Bank and Thomas Randall Stevens, the Bank’s and the Corporation’s Chairman and Chief Executive Officer, dated as of January 26, 2007. (4)*
10.6	Benefits Agreement by and between John P. Tomlinson, III, the Bank’s and Corporation’s Chief Administrative Officer, dated as of January 29, 2007. (4)*
10.7	Form of First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement.(5)*
10.8	First Amendment to the First Farmers and Merchants Corporation Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*
10.9	Form of First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement. (5)*
10.10	First Amendment to the First Farmers and Merchants Bank Director Deferred Compensation Agreement with Thomas Randall Stevens, dated as of January 5, 2007. (5)*
10.11	First Amendment to the First Farmers and Merchants Bank Amended and Restated Director Deferred Compensation Agreement with John P. Tomlinson, III, dated as of December 18, 2007. (5)*
10.12	Form of First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*
10.13	Form of Amendment to the First Farmers and Merchants National Bank Director Split Dollar Agreement. (5)*
10.14	First Farmers & Merchants Bank Group Term Carve-Out Plan, dated as of March 27, 2007. (5)*
10.15	First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*

19

10.16	Amendment to the First Farmers and Merchants National Bank Group Term Carve-Out Plan, dated as of July 23, 2002. (5)*
10.17	First Farmers & Merchants Bank Life Insurance Endorsement Method Split Dollar Plan Agreement, dated as of January 7, 2008. (5)*
10.18	Form of First Farmers and Merchants Corporation Director Deferred Compensation Agreement. (5)*
10.19	Form of First Farmers and Merchants Bank Director Deferred Compensation Agreement. (5)*
10.20	First Farmers and Merchants Bank Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*
10.21	First Farmers and Merchants Corporation Director Deferred Compensation Agreement with Tim E. Pettus, dated as of March 5, 2008. (5)*
10.22	Employment Agreement with Barry B. White, dated as of November 18, 2003. *
13	Annual Report to Shareholders.
21	List of Subsidiaries.
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	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Income for each of the years ended December 31, 2013,   2012 and 2011; (iii) the Consolidated Statements of Changes in Shareholders’ Equity for each of the years ended December 31, 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2013, 2012 and 2011; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

*          Indicates a compensatory plan or arrangement.

(1)        Incorporated by reference to 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 to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 13, 2011 (File Number 000-10972).

(3)        Incorporated by reference to the First Farmers and Merchants Corporation Amendment No. 2 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 July 19, 2004 (File Number 000-10972).

(4)        Incorporated by reference to the First Farmers and Merchants Corporation Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2007 (File Number 000-10972).

(5)        Incorporated by reference to the First Farmers and Merchants Corporation Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009 (File Number 000-10972).

20

EX-13

COMPARATIVE PERFORMANCE

                Set forth below is a graph comparing the yearly change in the cumulative total shareholder return on the common stock of First Farmers and Merchants Corporation (FF&M in the graph) against the cumulative total return of the S&P 500 Index and the Dow Jones Select Regional Bank Index for the five-year period commencing December 31, 2008 and ending December 31, 2013.

VALUE OF $100 INVESTED ON DECEMBER 31, 2008

	2008		2009		2010		2011		2012		2013
FF&M *	$	100.00	$	91.53	$	67.52	$	62.30	$	51.83	$	59.19
DOW JONES SELECT REGIONAL BANK INDEX **	100.00		110.47		133.61		117.13		138.77		191.75
S & P 500 ***	100.00		126.47		145.54		148.61		172.23		227.99

*	Assumes that the value of the investment in FF&M was $100 on December 31, 2008, with all dividends reinvested.
**	Assumes that the value of the investment in the index was $100 on December 31, 2008, with all dividends reinvested.
***	Assumes that the value of the investment in the index was $100 on December 31, 2008, with all dividends reinvested.

  4

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report to Shareholders 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. These forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “hopes,” “may,” “plans,” “will,” or “anticipates,” or the negatives of such terms.  We caution you not to place undue reliance on such forward-looking statements in this Annual Report to Shareholders because results could differ materially from those anticipated as a result of a variety of factors.  These forward-looking statements include, without limitation, those relating to the quality of service provided to customers, reduction in net loans, the effect of fluctuating interest rates on net interest income, the stability of market rates, adequate access to capital to meet liquidity needs, capital expenditures, the completion of our new branch, cash dividends, cash flows on impaired loans, the present value of servicing income, deferred tax assets, potential issuance of shares, the fair value of bonds, impairment of securities, lease commitments, troubled debt restructurings,  the Federal Home Loan Bank of Cincinnati (the “FHLB”) credit line, repayment of loans by borrowers, legal claims, capital adequacy requirements, fair value valuation methodologies, fair value of other assets, valuation of financial instruments, post-retirement benefit payments, interest rate sensitivity and risk, diversification of the loan portfolio, gross interest income, the adequacy of allowance for loan and lease losses, the loan concentration, expected maturity of investment securities, intent of management to hold certain loans until maturity or payoff, the value of underlying collateral and the impact of accounting standards on the financial statements.  Factors that could affect our results include, but are not limited to, changes in economic conditions; fluctuations in prevailing interest rates and the effectiveness of our risk monitoring systems; our ability to maintain credit quality; our ability to provide market competitive products and services; laws and regulations affecting financial institutions in general; our ability to operate and integrate new technology; the effectiveness of our interest rate hedging strategies; government fiscal and monetary policies; changes in our operating or expansion strategy; changes in our assumptions or estimation methodologies; the availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity; limitations on our ability to pay dividends and to meet our cash obligations; assumption and judgments about the collectability of our loan portfolio; our ability to compete with other financial services companies and other factors generally understood to affect the financial results of financial services companies.

EXECUTIVE OVERVIEW

General

First Farmers and Merchants Corporation (the “Corporation”) was incorporated on March 31, 1982 as a Tennessee corporation.  As of December 31, 2013, the only direct subsidiary of the Corporation was First Farmers and Merchants Bank (the “Bank”), which conducts the principal business of the consolidated company.  The Bank was organized as a national bank in 1954 as a successor to a state bank that was organized in 1909.  The Bank remained a national bank until July 5, 2005, when it converted back to a state-chartered bank and changed its name from First Farmers and Merchants National Bank to First Farmers and Merchants Bank.  The Bank has direct and indirect subsidiaries through which it holds F&M West, Incorporated, Maury Tenn, Incorporated and Maury Tenn Properties, Incorporated. The principal executive offices of the Corporation are located at 816 South Garden Street, Columbia, Maury County, Tennessee.   Management of the Corporation evaluates the financial condition of the Corporation in terms of the Bank’s operations within its service area. 

            All dollar amounts in this Annual Report to Shareholders, other than share and per-share amounts, are in thousands unless otherwise noted.

Financial Condition

            The Corporation’s assets consist primarily of its investment in the Bank and other smaller investments.  Its primary activities are conducted through the Bank.  The Bank is committed to providing quality services in diverse markets and a changing interest rate environment.  Management hopes to provide Bank customers the quality service of a community bank and the safety and strength of a regional bank.

5

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

At December 31, 2013, the Corporation’s consolidated total assets were $1,093,833, its consolidated net loans were $598,171, its total deposits were $957,337 and its total shareholders’ equity was $102,673.  The economic climate in the Corporation’s market area of middle Tennessee began to stabilize in 2013, as evidenced by the Corporation’s loan volume, an increase of 7.1% of net loans at December 31, 2013 compared to December 31, 2012.  Total deposits increased by 2.6% and total shareholders’ equity decreased by 10.4% over the same period.  The net unrealized loss on securities, which makes up a portion of other comprehensive income, contributed to the decrease in shareholders’ equity. 

Results of Operations

            Consolidated net income in 2013 totaled $9,876, a 29.8% increase from 7,608 in 2012 and a 41.2% increase from $6,996 in 2011.  Net interest income increased 5.9% from 2012 and increased 4.3% from 2011.  With interest rates continuing on a downward trend, loan yields have continued to decrease, while volume has increased.  On a per common share basis, net income totaled $1.93 for 2013 versus $1.43 for 2012 and $1.30 for 2011.

            The accompanying tables and the discussion and financial information are presented to aid in understanding the Corporation’s financial position and results of operations.  The emphasis of this discussion is on the years ended December 31, 2013, 2012 and 2011; however, financial information for prior years will also be presented where appropriate or required.  This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.

            The Corporation’s financial condition is dependent on a variety of factors, including the quality and nature of its assets, its liability and capital structure, the market and economic conditions and the quality of its personnel.

FINANCIAL CONDITION

Net Interest Margin

            Net interest margin is defined as the difference between the revenue from earning assets (primarily interest income) and interest expense related to interest bearing liabilities.  Net interest margin is a function of the average balances of earning assets and interest bearing liabilities and the yields earned and rates paid on those balances.  In order to succeed in the banking industry, it is critical to maintain the net interest margin at a level that, when coupled with noninterest revenues, exceeds additions to the allowance for loan and lease losses, noninterest expenses and income taxes and yields an acceptable profit. 

           The Corporation plans the Bank’s operations with the goal of maintaining a satisfactory spread between the yields on earning assets and the related cost of interest bearing funds.  The gross interest spread is determined by comparing the taxable equivalent gross interest margin to average earning assets before deducting the allowance for loan losses.  This spread reflects the overall profitability of earning assets, including both those funded by interest bearing sources and those that do not generate interest (primarily noninterest bearing demand deposits).  This spread is most often used when analyzing a banking institution’s overall gross margin profitability compared to that of other financial institutions.  Management uses calculations and similar ratios to assist in pricing decisions for interest-related products.  Table A below presents the average daily balances, the components of the gross interest margin (on a taxable equivalent basis), the yield or rate, and the incremental and gross interest spread for each of the last three years by major categories of assets and liabilities.

6

 

            TABLE A - Distribution of Assets, Liabilities, Shareholders’ Equity, Interest Rates and Interest Differential

	YEAR ENDED DECEMBER 31,
	2013			2012			2011
(Dollars in thousands)	Average	Rate/		Average	Rate/		Average	Rate/
	Balance	Yield	Interest	Balance	Yield	Interest	Balance	Yield	Interest
ASSETS
Interest earning assets
Loans, net, see note 2	$    572,913	5.05%	$ 28,949	$    518,158	5.50%	$ 28,474	$ 534,841	5.67%	$ 30,338
Bank deposits	21,706	1.73%	375	41,560	0.28%	116	28,594	0.25%	71
Taxable securities	311,796	1.82%	5,677	295,004	1.75%	5,148	205,631	2.18%	4,485
Tax exempt securities, see note 2	78,138	5.97%	4,667	83,788	5.95%	4,956	95,814	5.93%	5,679
Federal funds sold	12,732	0.25%	32	14,780	0.25%	37	11,920	0.23%	27
TOTAL EARNING ASSETS	997,285	3.98%	$ 39,700	953,290	4.06%	$ 38,731	876,800	4.63%	$ 40,600
Noninterest earning assets
Cash and due from banks	16,775			16,096			16,198
Bank premises and equipment	25,795			25,886			23,914
Other assets	47,632			59,047			58,400
TOTAL ASSETS	$ 1,087,487			$ 1,054,319			$ 975,312
LIABILITES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts	$    432,853	0.15%	$      630	$    408,077	0.22%	$      896	$ 368,319	0.35%	$   1,273
Savings	89,453	0.05%	47	80,026	0.08%	62	74,309	0.12%	91
Time up to $100	122,947	0.75%	916	130,391	0.87%	1,132	136,691	1.09%	1,493
Time over $100	119,130	0.92%	1,101	118,208	1.06%	1,253	105,514	1.29%	1,366
TOTAL INTEREST BEARING               DEPOSITS	764,383	0.35%	2,694	736,702	0.45%	3,343	684,833	0.62%	4,223
Federal funds purchased and securities
sold under agreements to repurchase	19,855	0.31%	62	18,934	0.38%	72	11,980	0.48%	57
FHLB borrowing	3,868	3.90%	151	11,802	3.61%	426	18,807	3.52%	662
Other liabilities	-	-	-	-	0.00%	-	400	-	-
TOTAL INTEREST BEARING
LIABILITIES	788,106	0.37%	$   2,907	767,438	0.50%	$   3,841	716,020	0.69%	$   4,942
Noninterest bearing liabilities
Demand deposits	173,648			156,784			135,417
Other liabilities	14,800			15,700			14,494
TOTAL LIABILITIES	976,554			939,922			865,931
Shareholders' equity	110,933			114,397			109,381
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$ 1,087,487			$ 1,054,319			$ 975,312
Spread between combined rate earned and
combined rates paid*		3.61%			3.56%			3.94%
Net yield on interest-earning assets*		3.69%			3.66%			4.07%

* Taxable equivalent basis

Notes:
1.	U.S. government (agency, state and political subdivision), and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities.  Most municipal debt securities are nontaxable.
2.	The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.  Loans include nonaccrual loans for all years presented.
3.	The average balances of the amortized cost of available-for-sale securities were used in the calculations in this table.

7

 

           Table B below sets forth, for the periods indicated, a summary of consolidated changes in interest earned and interest paid, reflected by the interest generated by volume changes and the interest generated by changes in the yield or rate.  On a tax equivalent basis, net interest income increased $1,904 for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily because of an increase in earning assets.  Interest paid on interest bearing deposits was down in 2013 compared to 2012 primarily because of lower average interest rates.   Interest paid on the FHLB line of credit was $151 in 2013 compared to $426 in 2012.

TABLE B - Volume and Yield/Rate Variances

(Taxable Equivalent Basis)

`	2013 Compared to 2012			2012 Compared to 2011
			Net			Net
		Yield	Increase		Yield	Increase
	Volume	/Rate	(Decrease)	Volume	/Rate	(Decrease)
Revenue earned on
Loans, net	$  3,012	$  (2,537)	$         475	$    (946)	$    (918)	$    (1,864)
Bank deposits	(56)	315	259	32	13	45
Investment securities
Taxable securities	292	238	530	1,948	(1,285)	663
Tax-free securities	(354)	65	(289 )	(782)	34	(748)
Other Investments	-	-	-	-	4	4
Federal funds sold	(5)	0	(5)	7	3	10
Total interest earning assets	2,889	(1,919)	970	259	(2,149)	(1,890)
Interest paid on
NOW and money market accounts	54	(320)	(266)	139	(516)	(377)
Savings deposits	8	(23)	(15)	7	(36)	(29)
Time deposits up to $100	(65)	(151)	(216)	(69)	(292)	(361)
Time deposits over $100	10	(162)	(152)	164	(277)	(113)
Federal funds purchased and securities
sold under agreements to repurchase	3	(13)	(10)	33	(18)	15
Short term debt	-	-	-	-	-	-
Long term debt	(286)	11	(275)	(247)	11	(236)
Total interest-bearing funds	(276)	(658)	(934)	27	(1,128)	(1,101)
Net interest earnings	$  3,165	$  (1,261)	$      1,904	$     232	$ (1,021)	$       (789)

Notes:
1.	The change in interest earned or paid resulting from both volume and rate or yield has been allocated accordingly in proportion to the relationship of the absolute amounts of the change in each.   Loans include nonaccrual loans for all years presented.
2.	The computation of the taxable equivalent adjustment has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-exempt assets.
3.	U.S. government (agency, state and political subdivision), and corporate debt securities plus equity securities in the available-for-sale and held-to-maturity categories are taxable securities.

8

Assets and Liabilities

Average earning assets increased 4.6% in 2013 compared to 2012 and increased 8.7% in 2012 compared to 2011.  As a financial institution, the Corporation’s primary earning assets are loans made by the Bank.  In 2013, average net loans represented 57.4% of average earning assets compared to 54.4% of average earnings assets at December 31, 2012.  Average net loans increased 10.6% in 2013 compared to 2012 and decreased 3.1% in 2012 compared to 2011.  Management of the Corporation believes that average net loans will increase throughout 2014 because of the increase in demand for loans over the past six months.

Average investment securities, which comprised 39.1% of average earning assets in 2013, increased 2.9% from 2012 compared to a 25.7% increase in 2012 from 2011.  This increase in average investments was the result of sluggish loan growth in the half of the year and therefore management grew the investment portfolio during this time. Average total assets increased 3.2% during 2013 compared to an increase of 8.1% between 2012 and 2011. 

            The Bank’s average deposits increased 5.0% in 2013 compared to 2012.  The increase in average deposits for 2012 was primarily a result of an increase in interest bearing deposits, which also contributed to the Bank’s 8.9% increase in average deposits in 2012 compared to 2011.  Average interest-bearing transaction accounts in 2013 increased 3.8% from 2012.  Time deposits up to $100 decreased 5.7% as of December 31, 2013 compared to December 31, 2012 and time deposits over $100 increased 0.8% over the same period.  Average savings deposits increased 11.8% in 2013 compared to 2012.  Average Negotiable Order of Withdrawal (“NOW”) and money market accounts increased 6.1% in 2013 compared to 2012.  Savings deposits have historically been steady providers of a core, low cost source of funding.

Customer relationship development helped maintain a relatively stable base in noninterest bearing deposits during 2013.  The Bank’s noninterest bearing deposits have remained strong and were 18.5% of average total deposits in 2013, 17.5% of average total deposits in 2012 and 16.5% of average total deposits in 2011.  Average noninterest bearing deposits increased 10.8% for 2013 and 15.8% for 2012.

            The Bank has a Blanket Agreement for Advances and Security Agreement with the FHLB for term debt or other obligations.  For more information, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.

LIQUIDITY AND CAPITAL RESOURCES

           The Bank uses a formal asset and liability management process to ensure adequate liquidity and control interest rate risk.  The Bank’s goal of liquidity management is to provide adequate funds to meet loan demand and any potential unexpected deposit withdrawals.  The Bank accomplishes this goal by striving for consistent core deposit growth, holding adequate liquid assets and maintaining unused capacity to borrow funds.  The Bank’s objective of interest rate risk management is to maintain reasonable stability in the gross interest margin despite changes in the level of interest rates and the spread among interest rates.

Liquidity

Most of the capital needs of the Bank historically have been financed with retained earnings and deposits received, and the Corporation’s primary source of liquidity has been dividends declared by the Bank.  The Bank’s Board of Directors has adopted a liquidity policy that outlines specific liquidity target balances.  Compliance with this policy is reviewed quarterly by the Bank’s Asset/Liability Committee and results are reported to the Bank’s Board of Directors.  At December 31, 2013, available liquidity was $271,383 compared to $282,724 as of December 31, 2012. 

Management believes that the Corporation’s traditional sources of cash generated from the Bank’s operating activities are adequate to meet the Corporation’s liquidity needs for normal ongoing operations; however, the Bank also has access to additional sources of funds, if necessary, through additional advances from the FHLB or the Cash Management Advance Line of Credit Agreement with the FHLB.  In March 2008, the Bank obtained five advances at $7,000 each from the FHLB, and in September 2008, the Bank obtained two additional advances of $3,100 each for a total borrowing in 2009 of $41,200.  The first three scheduled repayments of the advances were made in March 2010, March and September 2011, and March 2012.  The remaining payments occurred in March and September 2013.  The borrowings from the FHLB have been used generally for investment strategies to enhance the Bank’s portfolio.  

9

Interest Rate Risk

           The Bank uses an earnings simulation model to evaluate the impact of different interest rate scenarios on the gross margin.  Each quarter, the Bank’s Asset/Liability Committee assesses the relationship of rate sensitive earning assets to rate sensitive interest bearing liabilities (interest rate sensitivity), which is the principal factor in determining the effect that fluctuating interest rates will have on future net interest income.  Rate sensitive earning assets and interest bearing liabilities are those that can be repriced to current market rates within a defined time period.  The Asset/Liability Committee measures near-term risk (within the next 12 and 24 months) to net interest income resulting from changes in interest rates.  The model incorporates the Bank’s assets and liabilities, together with forecasted changes in the balance sheet mix and assumptions that reflect the current interest rate environment, to simulate the effect of possible changes in interest rates on net interest income.  The Asset/Liability Committee’s policy is to conduct a monthly review of budgeted financial goals where the actual dollar change in net interest income is different from interest rate movements.  A negative dollar change in net interest income for a 12- and 24- month period of less than 10.0% of net interest income given a 200 basis point shift in interest rates is considered an acceptable rate risk position.  At December 31, 2013, if interest rates were to rise 200 basis points (2.0%) over the next 24 months, net interest income would be $385 more than currently projected if rates were to remain stable.  This would represent an increase in net interest income of 1.2%.  At December 31, 2013, if interest rates were to decline 100 basis points (1.0%) over the next 24 months, net interest income would be $2,498 less than the projection of rates remaining stable.  This would represent a decrease in net interest income of 7.5%.  The changes in percentages in both cases are within policy guidelines established by the Bank’s Board of Directors.

           Another tool used to monitor the Bank’s overall interest rate sensitivity is a gap analysis (the difference between the earning asset and interest bearing liability amounts scheduled to be re-priced to current market rates in subsequent periods).  Table C below shows the Bank’s rate-sensitive position at December 31, 2013, as measured by the gap analysis.  Non-maturing balances such as money market, savings and NOW accounts have no contractual or stated maturities.  Management has attempted to use historical data (pricing history) on these categories to best determine the impact of these non-maturing balances on the net interest margin as interest rates change.  Management anticipates that rates will remain steady through most of 2014 and has determined that the Bank is in an acceptable rate risk position.  Table A under the heading “Net Interest Margin” above provides additional information regarding the largest components of interest bearing liabilities.

TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)	Three Months		Three to Six		Six to 12		Over One
As of December 31, 2013	or Less		Months		Months		Year		Total
Earning assets
Bank time deposits	$	35,017	$	-	$	-	$	-	$	35,017
Taxable investment securities	1,104		712		1,382		280,179		283,377
Tax-exempt investment securities	-		425		332		73,418		74,175
Loans and leases, net of deferred fees	23,909		27,700		64,238		482,324		598,171
Total earning assets	60,030		28,837		65,952		835,921		990,740
Interest-bearing liabilities
NOW and money market accounts	141,927		-		-		304,740		446,667
Savings	-		-		-		92,013		92,013
Time up to $100	26,437		32,278		32,032		25,310		116,057
Time over $100	31,514		27,309		36,120		27,834		122,777
Other short-term debt	18,095		-		-		-		18,095
FHLB borrowing	-		-		-		-		-
Total interest bearing liabilities	217,973		59,587		68,152		449,897		795,609
Period gap	(157,943)		(30,750)		(2,200)		386,024		195,131
Cumulative gap	$	(157,943)	$	(188,693)	$	(190,893)	$	195,131

10

Capital Expenditures

           Historically, internal growth has financed the capital needs of the Bank.  In 2012, the Bank completed the construction of a new branch in Williamson County, Tennessee.  The branch opened in April of 2012.   The Bank signed a ground lease to build a branch in Davidson County, Tennessee.  The branch is expected to be completed by second quarter 2014.

Contractual Obligations

           The following table summarized the Corporation’s contractual obligations as of December 31, 2013:

	Payment due by period
Contractual Obligations	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Operating lease obligations	$        5,525	$               336	$               667	$               580	$            3,942
Repurchase agreements and time deposits	256,929	203,782	40,134	13,013	-
Total	$    262,454	$        204,118	$          40,801	$          13,593	$            3,942

Dividends

             Cash dividends declared in 2013 were 37.9% of net income compared to 51.1% of net income for 2012.  The Corporation plans to continue an average annual payout ratio over 20% while continuing to maintain a capital to asset ratio reflecting financial strength and adherence to regulatory guidelines.

Regulatory Capital

           Under federal regulatory standards, in order to be adequately capitalized the Corporation’s Tier 1 Risk-Based Capital Ratio (ratio of Tier 1 Capital to risk-weighted assets) must be at least 4%, its Total Risk-Based Capital Ratio (ratio of total capital to risk-weighted assets) must be at least 8%, and its Tier 1 Leverage Capital Ratio (ratio of Tier 1 Capital to average assets) must be at least 4%.  Tier 1 Capital generally consists of common stock.  

            As of December 31, 2013, the Corporation’s Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratio and Tier 1 Leverage Capital Ratio were 14.1%, 15.3% and 9.4%, respectively.  At December 31, 2012, the comparable ratios were 14.5%, 15.8% and 9.7% respectively. Please refer to Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders for more information on the capital strength of the Corporation and the Bank.

Loans and Loan Quality

            The Bank’s loan portfolio is the largest component of earning assets and, therefore, provides the highest amount of revenue.  The loan portfolio also contains the highest exposure to risk, as a result of credit quality.  When analyzing potential loans, management assesses both interest rate objectives and credit quality objectives in determining whether to authorize a given loan and the appropriate pricing for that loan.  The Bank maintains a diversified portfolio in order to spread its risk and reduce its exposure to economic downturns that may occur in different segments of the economy or in particular industries.  As of December 31, 2013, total loans maturing and repricing after one year that have predetermined interest rates and floating or adjustable interest rates totaled $482,324.  The composition of the loan portfolio is disclosed in detail in Note 4 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders.

11

The following table presents the maturities of the Bank’s loans by category as of December 31, 2013: 

	Within One Year	One to Five Years	After Five Years	Total
Commercial, financial and agricultural	$         45,366	$         48,421	$         11,488	$       105,275
Tax exempt municipal loans	3,553	9,818	9,931	23,302
Real estate
Construction	15,495	8,831	5,612	29,938
Commercial mortgages	26,685	100,829	68,346	195,860
Residential mortgages	21,233	70,218	122,312	213,763
Other	3,211	12,940	6,202	22,353
Retail loans	9,198	6,942	135	16,275
Total	$       124,741	$       257,999	$       224,026	$       606,766

The lending activities of the Bank are subject to written underwriting standards and policies established by the Bank’s Board of Directors and management that include loan review procedures and approvals.  Applications for loans are received by designated employees at 15 of the Bank’s offices.  Depending primarily on the dollar amount of the loan, there are various approval levels required, including that of the Executive Committee of the Bank’s Board of Directors.

            The composition of the Bank’s loan and lease portfolio for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 were as follows:

	2013		Percentage of Total	2012		2011		2010		2009
Commercial and industrial:
Commercial	$	94,702	15.6%	$	83,631	$	60,448	$	61,192	$	63,695
Other	10,573		1.7%	11,594		2,601		5,446		2,943
Tax exempt municipal loans	23,302		3.8%	21,004		25,130		38,877		34,138
Real estate
Construction	30,685		5.1%	37,008		33,270		37,374		38,877
Commercial mortgages	195,860		32.3%	183,373		152,539		156,704		149,332
Residential mortgages	214,211		35.3%	196,349		196,913		221,748		238,349
Other	22,353		3.6%	19,393		30,410		31,129		32,464
Retail loans	16,275		2.6%	15,651		17,027		15,753		17,124
Lease financing receivables	-		-	-		-		-		274
Net unamortized loan origination fees	(1,195)		-	(844)		(536)		(490)		(541)
	$	606,766	100.0%	$	567,159	$	517,802	$	559,179	$	576,655

 A slight majority of the Bank’s outstanding loans continue to be housed in the Maury County portfolio in 2013.  Maury County housed 47.5% of the Bank’s outstanding loans at December 31, 2013, including most of its out-of-territory loans and participations purchased.  The Maury County portfolio experienced a $3,863 increase in outstanding loans for 2013.  The majority of the growth came from commercial lending. 

            Loan demand showed a marked improvement in the latter part of 2013, mainly due to commercial lending.  Commercial loans grew 5.5% from the previous year.  Portfolio growth and asset quality remain strong.  The bank will continue to diligently review its pricing structure and to seek out new lending opportunities and bank relationships within the seven-county footprint. 

12

  The Bank has a credit administration function that is responsible for assisting loan officers in underwriting new loans, reviewing problem loans, monitoring the status of problem loans from period to period, and assisting in their resolution.  This review process also includes semi-annual reviews by an outside party to assess the quality of the loan portfolio independently.  Management has concluded that this independent review has served to strengthen underwriting practices.  The analysis and review by the Bank’s credit administration department also includes a formal review that is prepared quarterly to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan and lease losses (“ALLL”).  Loan reviews of all relationships aggregating $400 and greater are completed on an annual schedule. 

            Loans that are impaired and not accruing interest were actively monitored in 2013 to determine those for which more aggressive action plans should be taken.  The Bank ended 2013 with $214, or 0.04% in net charge-offs.  The Bank’s charge-off level is tracking well under the Bank’s target level of 0.25% and below its peer group average of 0.27% for 2013.   Management believes that the ALLL was adequate at December 31, 2013.

            Table D below summarizes average loan balances and reconciles the ALLL for each of the last five years. 

Additions or reductions to the allowance, which are included in operating expenses, are also included. 

TABLE D - Loan Portfolio

	December 31,
(Dollars  In Thousands)	2013		2012		2011		2010		2009
Average amount of gross loans outstanding	$	581,596	$	526,973	$	543,203	$	573,524	$	588,821
Balance of allowance for possible loan
losses at beginning of year	8,809		9,200		9,420		8,929		8,625
Loans charged off
Commercial loans	222		1,690		3,353		2,046		2,069
Residential real estate loans	27		176		52		108		134
Loans to individuals	49		19		147		77		101
TOTAL  LOANS CHARGED OFF	298		1,885		3,552		2,231		2,304
Recoveries of loans previously charged off
Commercial loans	53		364		103		782		312
Residential real estate loans	2		2		-		-		19
Loans to individuals	29		8		104		44		42
TOTAL RECOVERIES	84		374		207		826		373
NET  LOANS CHARGED OFF	214		1,511		3,345		1,405		1,931
Provision (reduction) charged (credited)
to operating expenses	-		1,120		3,125		1,896		2,235
BALANCE AT END OF YEAR	$	8,595	$	8,809	$	9,200	$	9,420	$	8,929
Ratio of net charge-offs during the period
to average gross loans outstanding	0.04 %		0.29 %		0.62 %		0.24 %		0.33 %

   In reviewing the Bank’s loan portfolio, management categorizes certain loans as “classified assets,” which consist of substandard, doubtful and loss categories of loans, and “special mention,” which is a less severe category of loans that do not warrant an adverse classification.  The Bank closed 2013 with $8,065 in classified assets compared to $14,113 in 2012; of these amounts, $2,325 were classified as doubtful at December 31, 2013 compared to $2,455 as of December 31, 2012, $4,302 and $5,980 were classified as substandard at December 31, 2013 and 2012, respectively, and $1,438 and $5,678 were classified as OREO at December 31, 2013 and 2012, respectively.   At December 31, 2013, loans totaling $4,898, or 0.81% of the portfolio, were classified as “special mention” loans.  This compares to loans totaling $1,580 so classified at December 31, 2012, representing an increase of $3,318.

             Loans having recorded investments of $9,225 and $8,642 at December 31, 2013 and 2012 have been identified as impaired.  Loans amounting to $5,396 and $8,074 at December 31, 2013 and 2012, respectively, were not accruing interest.  These loans are considered nonaccrual loans and represented 0.9% and 1.4% of gross loans as of December 31, 2013 and 2012, respectively.  Interest received on nonaccrual loans during 2013 was $326, during 2012 was $484, and during 2011 was $959.  The Bank had no loans that were 90 days or more past due that were not included in nonaccrual loans as of December 31, 2013 or 2012.

13

    The Bank had $3,607 and $4,156 that qualified as “troubled debt restructurings” as defined in ASC Topic 310-40 as occasion of December 31, 2013 and 2012, respectively. Troubled debt restructurings are loans for which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower which would otherwise not be considered.  For a loan to be classified as a troubled debt restructuring, the borrower must be experiencing financial difficulties (even if the borrower is not currently in default on any of its indebtedness), and because of those difficulties the Bank must have made a concession that would otherwise not be granted.  These concessions can take many forms, including but not limited to granting temporary payment relief, restructuring a loan to extend the amortization or lower the required payment amount, and forgiveness of principal.  Likewise, the financial difficulty being experienced by a borrower can take many forms, including but not limited to:

• Being in default on any existing indebtedness;

• Declaring, or being in the process of declaring, bankruptcy;

• Significant doubt as to whether an existing business can continue to operate as a going concern;

• Historically demonstrating, or forecasting, insufficient cash flows with which to service all debt in a timely manner; or

• Absent the modification, the borrower cannot continue to keep all indebtedness current.

Once identified as a troubled debt restructuring, the bank will track these loans and periodically report to the Board of Directors the aggregate balances thereof.  Please refer to Note 1 and Note 4 in the Notes to Consolidated Financial Statements that are included elsewhere in this Annual Report to Shareholders for more information on the Bank’s policy regarding loan impairment and troubled debt restructuring.

RESULTS OF OPERATIONS

Interest Income and Expense

            Total interest income increased 2.7% during 2013 as a result of an increase in loan volume and slight increase in investment yields.  Interest and fees earned on loans totaled 76.7% of gross interest income during 2013 and increased 2.5% from 2012 as a result of an increase in loan volume.  Interest earned on securities and other investments totaled 23.3% of total interest income during 2013 and increased 3.3% from 2012 primarily because the investment portfolio’s yields have increased in same period.

            Total interest expense decreased 24.3% in 2013, compared to a 22.3% decrease in 2012 and a 29.4% decrease in 2011.  Decreases in the average interest rate paid on interest bearing liabilities contributed to the lower interest expense.  The cost of interest bearing deposits is monitored quarterly by the Bank’s Asset/Liability Committee.  The net interest margin (tax equivalent net interest income divided by average earning assets) was 3.69%, 3.66% and 4.07% for years ended December 31, 2013, 2012 and 2011, respectively.

            Net interest income on a fully taxable equivalent basis is influenced primarily by changes in:  (i) the volume and mix of earning assets and sources of funding; (ii) market rates of interest.  The impact of some of these factors can be controlled by management policies and actions.  External factors can also have a significant impact on changes in net interest income from one period to another.  Some examples of such factors include: (i) the strength of credit demands by customers; (ii) Federal Reserve Board monetary policy; and fiscal and debt management policies of the federal government, including changes in tax laws.  For the 12 months ended December 31, 2013, net interest income was $34,454, compared to $32,543 and $33,026 for the 12 months ended December 31, 2012 and 2011, respectively.

Noninterest Income and Expenses

           The components of non-interest income were as follows:

14

	2013		2012		2011
Trust	$	2,298	$	2,119	$	1,999
Deposit fees	6,479		6,689		6,784
Mortgage banking income (gains of loans sold)	437		511		469
Earnings on bank owned life insurance	497		705		717
Gain/loss on investment securities	829		2,294		1,458
Gain/loss on other real estate owned	(308)		(1,317)		(948)
Other	884		630		493
	$	11,116	$	11,631	$	10,972

           Noninterest income decreased 4.4% in 2013 compared to 2012 and increased 6.0% in 2012 compared to 2011.  Mortgage banking had a nominal decrease in 2013 compared to 2012. There was an $829 gain on sale of available-for-sale securities in 2013 compared to a $2,294 gain in 2012.   Income from service charges on accounts decreased 3.1% in 2013 compared to 2012, representing 58% of total noninterest income.  Income from fiduciary services offered in the Bank’s Trust Department increased 8.4% in 2013 compared to 2012, representing 20.7% of total noninterest income.  Stability in the equity and bond markets impacted the market value of the assets managed by the Trust Department and the related investment fees earned by the Bank. 

           The components of noninterest expense were as follows:

	2013		2012		2011
Personnel	$	17,901	$	19,406	$	18,836
Occupancy	2,581		2,528		2,488
Equipment	1,397		1,334		1,224
Other	10,934		10,246		10,569
	$	32,813	$	33,514	$	33,117

Noninterest expenses decreased 2.1% in 2013 compared to 2012.  A 7.8% decrease in salaries and benefits was the primary contributor to this increase, due mainly to less insurance expense for the year.  Furniture and equipment increased $53 in 2013, which was included in the 2013 budget.  Noninterest expenses increased 1.2% in 2012 compared to 2011.

Income Tax Expense

           Applicable income taxes on 2013 earnings amounted to $2,865, resulting in an effective tax rate of 22.5% compared to $1,916, or 20.1% in 2012.  The effective tax rate for 2013 and 2012 is a function of the net income earned and the effect of having a real estate investment trust structure, which results in having no Tennessee excise tax expense and the effects of interest earned on tax-exempt loans and securities. 

Net Income

               Net income was 29.8% higher in 2013 than in 2012.  No provision for loan losses was expensed in 2013, which was the primary reason for the increase in net income.  The Bank’s annualized charge-offs ended the year at 0.04%, an improvement from 0.27% in 2012.  Classified assets declined $7,192, or 40.2% from 2013 to 2012.  Based on these improving trends,  the allowance for loan losses was adequate for our loan portfolio. Net income was 8.7% higher in 2012 than in 2011 primarily because of the 64.2% decrease in the provision for loan losses from 2012 to 2011.

OFF-BALANCE SHEET ARRANGEMENTS

            As of December 31, 2013, the Bank was 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 included commitments to extend credit and standby letters of credit. Please refer to Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report to Shareholders for more information on the Bank’s commitments and contingencies.  Please refer to Table C above under the heading "Liquidity and Capital Resources" for a summary of the Corporation’s earning assets and interest bearing liabilities by maturities.

CRITICAL ACCOUNTING POLICIES

15

            The accounting and reporting policies followed by the Corporation conform, in all material respects, to GAAP and to general practices within the financial services industry.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  In connection with the application of those principles, the Corporation’s management has made judgments and estimates that, in the case of determining the ALLL and the recognition of deferred income tax assets has been critical to the determination of the Corporation’s financial position, results of operations and cash flows. 

Allowance for Loan and Lease Losses

           The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporation’s Board of Directors.  The Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation.  This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

           Management has implemented procedures that give detailed historical data by segment of retail and commercial 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:

• 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 management, input from independent loan reviews and reviews that may have been conducted by bank regulators as part of their usual examination process.  Refer to notes 1, 4 and 5 in the consolidated financial statements for more information on the allowance for loan losses.

           The following table gives a breakdown of the ALLL for each loan category:

	December 31,
	2013		2012
Balance at End of Period Applicable to:	Amount	Percent of ALLL	Amount	Percent of ALLL
Commercial	$           7,359	85.62%	$           7,528	85.46%
Residential real estate	1,084	12.61%	1,109	12.59%
Consumer and other retail	152	1.77%	172	1.95%
Total  loans	$           8,595	100.00%	$           8,809	100.00%

16

 

Deferred Income Tax Assets

  Deferred income tax assets consist mainly of the tax effect of excess provisions for loan and lease losses over actual losses incurred, the unrealized loss on available-for-sale securities and deferred compensation.  The Corporation and the Bank have paid taxes for many years.  Management believes that it is more likely than not that these assets will be realized in future years.

SHAREHOLDER INFORMATION

            The 5,021,012 shares of common stock of the Corporation outstanding at December 31, 2013 had an estimated market value of $125,525 and were held by 2,054 shareholders located primarily in the Corporation’s market area.  A small number of shareholders are not identified individually because some bank nominees, including the Bank’s Trust Department, are listed as record owners when, in fact, these holdings represent more than one beneficial owner.  No single shareholder’s ownership exceeded 5% at year end.

There is no established public trading market for shares of the Corporation’s common stock.  The table below shows the high and low price of the Corporation’s common stock taken from reported prices by those buyers and sellers willing to disclose this information.  This table also shows the semi-annual dividend declared per share of common stock, in each of the last two years.  In 2013, the Corporation repurchased 158,988 shares of its common stock in several privately negotiated transactions. 

		High	Low	Dividend
2013	First Quarter	$      27.50	$       18.52	$            -
	Second Quarter	25.00	19.00	0.370
	Third Quarter	22.50	20.00	-
	Fourth Quarter	25.00	23.00	0.370
2012	First Quarter	$      30.00	$       27.00	$            -
	Second Quarter	28.00	20.00	0.370
	Third Quarter	45.00	21.00	-
	Fourth Quarter	23.00	22.48	0.370

ADDITIONAL FINANCIAL DATA

            The following table presents consolidated comparative data for the Corporation for the years shown: 

COMPARATIVE DATA
(Dollars In Thousands)
	2013		2012		2011			2010		2009		2008			2007
Total Assets	$	1,093,833	$	1,090,363	$	1,017,808		$	941,625	$	935,009	$		911,137	$		823,046
Average assets	$	1,087,487	$	1,054,316	$		975,671	$	953,155	$	922,549	$		855,278	$		797,239
Average loans (net)	$	572,913	$	518,158	$	534,841		$	564,388	$	579,998	$	534,441		$	484,308
Average deposits	$	938,032	$	893,486	$	820,250		$	795,786	$	760,315	$	701,428		$	673,728
Return on
average assets	0.91%		0.72%		0.72%			0.76%		0.87%		1.08%			1.08%
Return on
average equity	8.90%		6.65%		6.21%			6.84%		7.50%		8.60%			8.36%
Tier 1 capital
to average assets	9.03%		9.67%		10.24%			10.38%		10.55%		10.93%			12.22%

17

Selected Financial Information
(Dollars in Thousands, Except Per Share Data)
	2013		2012		2011		2010		2009		2008
Interest Income
Interest and fees on loans	$	28,653	$	27,951	$	29,838	$	31,925	$	31,815	$	32,901
Income on investment securities
Taxable interest	5,501		4,967		4,219		3,857		4,894		6,649
Exempt from federal income tax	2,913		3,106		3,616		3,575		3,761		3,866
Dividends	197		207		197		194		204		194
	8,611		8,280		8,032		7,626		8,859		10,709
Other interest income	97		153		98		58		66		271
Total Interest Income	37,361		36,384		37,968		39,609		40,740		43,881
Interest Expense
Interest on deposits	2,694		3,343		4,223		6,029		7,916		11,626
Interest on other short term borrowings	213		498		719		972		1,156		831
Total Interest Expense	2,907		3,841		4,942		7,001		9,072		12,457
Net Interest Income	34,454		32,543		33,026		32,608		31,668		31,424
Provision For Possible Loan Losses	-		1,120		3,125		1,896		2,235		1,687
Net Interest Income After
Provision for Loan Losses	34,454		31,423		29,901		30,712		29,433		29,737
Noninterest Income
Trust department income	2,298		2,119		1,999		1,965		1,924		2,463
Service fees on deposit accounts	6,479		6,689		6,784		6,781		7,231		7,705
Other service fees, commissions, and fees	563		610		584		708		431		393
Other operating income	947		(81)		147		(1,300)		793		974
Securities gains	829		2,294		1,458		1,614		2,482		1,351
Total Noninterest Income	11,116		11,631		10,972		9,768		12,861		12,886
Noninterest Expense
Salaries and employee benefits	17,901		19,406		18,836		15,811		17,137		16,562
Net occupancy expense	2,581		2,528		2,488		2,116		2,662		2,620
Furniture and equipment expense	1,397		1,334		1,224		1,076		1,120		1,007
Other operating expenses	10,950		10,262		10,585		13,191		12,148		11,259
Total Noninterest Expense	32,829		33,530		33,133		32,194		33,067		31,448
Income Before Provision
For income Taxes	12,741		9,524		7,740		8,286		9,227		11,175
Provision For Income Taxes	2,865		1,916		744		1,043		1,187		1,967
Net Income	$	9,876	$	7,608	$	6,996	$	7,243	$	8,040	$	9,208
Earnings Per Common Share	$	1.93	$	1.43	$	1.30	$	1.32	$	1.45	$	1.63
Weighted Average Shares Outstanding	5,110,849		5,315,634		5,400,063		5,486,183		5,537,611		5,635,060
(See Note 1 of Notes to Consolidated Financial Statements)

18

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors
  and Shareholders
First Farmers and Merchants Corporation
Columbia, Tennessee

We have audited First Farmers and Merchants Corporation’s (Corporation) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting.  Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

Audit Committee, Board of Directors
  and Shareholders
First Farmers and Merchants Corporation
Columbia, Tennessee
Page 2

In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of December 31, 2013, and our report dated March 6, 2014, expressed an unqualified opinion thereon.

//s//BKD, LLP

Louisville, Kentucky
March 6, 2014

FIRST FARMERS AND MERCHANTS CORPORATION

COLUMBIA, TENNESSEE

Management Report on Internal Control Over Financial Reporting.

            The management of First Farmers and Merchants Corporation is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in its annual report.  The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, as such, include amounts based on informed judgments, assumptions and estimates made by management.

            The management of First Farmers and Merchants Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.  The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the preparation and fair presentation of published financial statement.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

            The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2013.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (1992).”  Based on our assessment we believe that, as of December 31, 2013, the Corporation’s internal control over financial reporting is effective based on those criteria.

            BKD, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Corporation included in this annual report, has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013. The report, which expresses an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2013, is included in this annual report.
 

2

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

3

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors
  and Shareholders
First Farmers and Merchants Corporation
Columbia, Tennessee  

We have audited the accompanying consolidated balance sheets of First Farmers and Merchants Corporation (Corporation) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2013.  The Corporation’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation.  We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2014, expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

//s//BKD, LLP

Louisville, Kentucky
March 6, 2014

3

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
		December 31,		December 31,
		2013		2012
	(Dollars in Thousands, Except Per Share Data)
ASSETS	Cash and due from banks	$	20,391	$	23,443
	Interest-bearing due from banks	25,167		31,953
	Federal funds sold	9,850		15,000
	Total cash and cash equivalents	55,408		70,396
	Securities
	Available-for-sale (amortized cost $346,892
	and $339,971 as of December 31, 2013 and December 31, 2012, respectively)	329,714		345,718
	Held-to-maturity (fair market value $28,595
	and $33,420 as of December 31, 2013 and December 31, 2012, respectively)	27,839		31,755
	Total securities	357,553		377,473
	Loans, net of deferred fees	606,766		567,159
	Allowance for loan and lease losses	(8,595)		(8,809)
	Net loans	598,171		558,350
	Bank premises and equipment, net	24,868		26,417
	Other real estate owned	1,438		5,678
	Bank owned life insurance	25,867		25,112
	Goodwill	9,018		9,018
	Deferred tax asset	10,905		3,884
	Other assets	10,605		14,035
	TOTAL ASSETS	$	1,093,833	$	1,090,363
LIABILITIES	Deposits
	Noninterest-bearing	$	179,823	$	169,136
	Interest-bearing	777,514		763,713
	Total deposits	957,337		932,849
	Securities sold under agreements to repurchase	18,095		17,068
	Accounts payable and accrued liabilities	15,728		15,755
	Federal Home Loan Bank (FHLB) advances	-		10,100
	TOTAL LIABILITIES	991,160		975,772
SHAREHOLDERS'	Common stock - $10 par value per share, 8,000,000 shares
EQUITY	authorized; 5,021,012 and 5,180,000 shares issued
	and outstanding as of  December 31, 2013 and
	December 31, 2012, respectively	50,210		51,800
	Retained earnings	61,369		57,366
	Accumulated other comprehensive income (loss)	(9,001)		5,330
	TOTAL SHAREHOLDERS' EQUITY BEFORE NONCONTROLLING INTEREST - PREFERRED STOCK OF SUBSIDIARY	102,578		114,496
	Noncontrolling interest - preferred stock of subsidiary	95		95
	TOTAL SHAREHOLDERS' EQUITY	102,673		114,591
	TOTAL LIABILITIES AND
	SHAREHOLDERS' EQUITY	$	1,093,833	$	1,090,363
The accompanying notes are an integral part of the condensed consolidated financial statements.

4

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

 

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
		Years Ended December 31,
		2013		2012		2011
INTEREST AND	Interest and fees on loans	$	28,653	27,951		29,838
DIVIDEND	Income on investment securities
INCOME	Taxable interest	5,501		4,967		4,219
	Exempt from federal income tax	2,913		3,106		3,616
	Dividends	294		360		295
	Total interest income	37,361		36,384		37,968
INTEREST	Interest on deposits	2,694		3,343		4,223
EXPENSE	Interest on other borrowings	213		498		719
	Total interest expense	2,907		3,841		4,942
	Net interest income	34,454		32,543		33,026
	Provision for loan and lease losses	-		1,120		3,125
	Net interest income after provision	34,454		31,423		29,901
NONINTEREST	Gain on loans sold	437		511		469
INCOME	Trust department income	2,298		2,119		1,999
	Service fees on deposit accounts	6,479		6,689		6,784
	Brokerage fees	361		231		36
	Earnings on bank owned life insurance	497		705		717
	Gain on sale of securities	829		2,294		1,458
	Loss on foreclosed property	(308)		(1,317)		(948)
	Other non-interest income	523		399		457
	Total noninterest income	11,116		11,631		10,972
NONINTEREST	Salaries and employee benefits	17,901		19,406		18,836
EXPENSE	Net occupancy expense	2,581		2,528		2,488
	Furniture and equipment expense	1,397		1,334		1,224
	Data processing expense	2,288		2,007		1,867
	Legal and professional fees	1,037		943		997
	Stationary and office supplies	293		279		286
	Advertising and promotions	1,090		1,179		1,217
	FDIC Insurance premium expense	728		703		875
	Other real estate expense	128		309		640
	Other noninterest expense	5,370		4,826		4,687
	Total noninterest expenses	32,813		33,514		33,117
	Income before provision for income taxes	12,757		9,540		7,756
	Provision for income taxes	2,865		1,916		744
	Net income before noncontrolling interest - dividends on preferred stock of subsidiary	9,892		7,624		7,012
	Noncontrolling interest-dividends on preferred stock subsidiary	16		16		16
	Net income for common shareholders	$	9,876	$	7,608	$	6,996
PER SHARE	Weighted Average Shares Outstanding	5,110,849		5,315,634		5,393,765
	Earnings per share	$	1.93	$	1.43	$	1.30
The accompanying notes are an integral part of the consolidated financial statements.

5

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

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
	2013		2012		2011
Net Income for common shareholders	$	9,876	$	7,608	$	6,996
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax (benefit) expenses of ($8,507), $1,204, and $2,960	(13,589)		1,923		4,728
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively	(510)		(1,411)		(897)
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively	(232)		1,610		1,940
Other Comprehensive Income (Loss)	(14,331)		2,122		5,771
Total Comprehensive Income (Loss)	$	(4,455)	$	9,730	$	12,767
The accompanying notes are an integral part of the consolidated financial statement

6

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

FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
								Accumulated
								Other
	Shares of	Preferred		Common		Retained		Comprehensive
Years Ended December 31, 2013, 2012 and 2011	stock	Stock		Stock		Earnings		Income (Loss)		Total
Balance at December 31, 2010	5,430,000	$	95	$	54,300	$	54,524	$	(2,563)	$	106,356
Net income before dividends on preferred stock of subsidiary						7,012				7,012
Other comprehensive income								5,771		5,771
Repurchase of common stock	(100,000)			(1,000)		(2,011)				(3,011)
Cash dividends declared, $0.74 per share						(3,963)				(3,963)
Cash dividends - preferred stock of subsidiary						(16)				(16)
Balance at December 31, 2011	5,330,000	95		53,300		55,546		3,208		112,149
Net income before dividends on preferred stock of subsidiary						7,624				7,624
Other comprehensive income								2,122		2,122
Repurchase of common stock	(150,000)			(1,500)		(1,900)				(3,400)
Cash dividends declared, $0.74 per share						(3,888)				(3,888)
Cash dividends - preferred stock of subsidiary						(16)				(16)
Balance at December 31, 2012	5,180,000	95		51,800		57,366		5,330		114,591
Net income before dividends on preferred stock of subsidiary						9,892				9,892
Other comprehensive loss								(14,331)		(14,331)
Repurchase of common stock	(158,988)			(1,590)		(2,132)				(3,722)
Cash dividends declared, $0.74 per share						(3,741)				(3,741)
Cash dividends - preferred stock of subsidiary						(16)				(16)
Balance AT December 31, 2013	5,021,012	$	95	$	50,210	$	61,369	$	(9,001)	$	102,673
The accompanying notes are an integral part of the consolidated financial statements.

7

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
		Years Ended December 31,
	(unaudited)	2013		2012		2011
OPERATING	Net income available for common shareholders	$	9,876	$	7,608	$	6,996
ACTIVITIES	Adjustments to reconcile net income to net cash provided
	by (used in) operating activities
	Provision for loan losses	-		1,120		3,125
	Provision for depreciation and amortization of
	premises and equipment	1,543		1,412		1,270
	Deferred tax benefit (expense)	1,950		(340)		(1,216)
	Net securities gains	(829)		(2,294)		(1,458)
	Gains on loans sold	(437)		(511)		(417)
	Proceeds from sale of mortgage loans held for sale	21,047		28,625		24,402
	Funding of mortgage loans held for sale	(18,481)		(28,065)		(23,985)
	Loss on other real estate owned	308		1,317		948
	Gain (loss) on sale of premises and equipment	38		(10)		-
	Amortization of investment security premiums,
	net of accretion of discounts	1,312		3,526		2,094
	Increase in cash surrender value of life insurance contracts	(497)		(705)		(717)
	(Increase) decrease in
	Other assets	1,243		741		1,177
	Increase (decrease) in
	Other liabilities	(287)		2,647		534
	Total adjustments	6,910		7,463		5,757
	Net cash provided by operating activities	16,786		15,071		12,753
INVESTING	Proceeds from sales of available-for-sale securities	137,150		421,346		140,580
ACTIVITIES	Proceeds from maturities and calls of available-for-sale securities	44,908		68,673		106,270
	Proceeds from maturities and calls of held-to-maturity securities	3,890		3,430		4,725
	Purchases of investment securities
	available-for-sale	(189,436)		(521,837)		(323,222)
	Net (increase) decrease in loans	(38,267)		(50,846)		38,031
	Proceeds from sale of other real estate owned	2,378		1,810		1,683
	Proceeds from sale of premises and equipment	799		-		-
	Purchases of premises and equipment	(831)		(786)		(263)
	Purchase of life insurance policies	(258)		(2,282)		(2,799)
	Net cash used in investing activities	(39,667)		(80,492)		(34,995)
FINANCING	Net increase in deposits	24,488		76,419		64,604
ACTIVITIES	Net increase  in securities sold under agreements to repurchase	1,027		721		10,162
	Payments to FHLB borrowings	(10,100)		(7,000)		(7,000)
	Repurchase of common stock	(3,722)		(3,400)		(3,011)
	Cash dividends paid on common stock	(3,800)		(3,944)		(1,991)
	Net cash provided by financing activities	7,893		62,796		62,764
	Increase (decrease) in cash and cash equivalents	(14,988)		(2,625)		40,522
	Cash and cash equivalents at beginning of period	70,396		73,021		32,499
	Cash and cash equivalents at end of period	$	55,408	$	70,396	$	73,021
	Supplemental disclosures of cash flow information
	Cash paid during the period for expenses
	Interest on deposits and borrowed funds	$	2,816	$	3,717	$	5,235
	Income taxes	2,072		860		1,143
	Loans to facilitate sale of other real estate owned	1,905		1,774		-
	Real estate acquired in settlement of loans	312		1,355		1,375
The accompanying notes are an integral part of the consolidated financial statements.

8

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

NOTE 1 – GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States (“GAAP”) and to general practices in the banking industry.  The significant accounting policies applicable to First Farmers and Merchants Corporation (the Corporation) are summarized as follows.

Nature of Operations

The Corporation is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Farmers and Merchants Bank (the Bank).  The Bank is primarily engaged in providing a full range of banking and financial services, including lending, investing of funds, obtaining deposits, trust and wealth management operations, and other financing activities to individual and corporate customers in the middle Tennessee area.  The Bank is subject to competition from other financial institutions.  The Corporation and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank.  The Bank has the following direct and indirect subsidiaries: F & M West, Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc.  Noncontrolling interests consist of preferred shares in Maury Tenn Properties, Inc. that are owned by third parties and Maury Tenn, Inc.  The preferred shares in Maury Tenn Properties, Inc. receive dividends, which are included in the consolidated statements of income.  Intercompany accounts and transactions have been eliminated in consolidation.

Certain items in prior financial statements have been reclassified to conform to the current presentation.  These reclassifications had no effect on net income.

 Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management of the Corporation and the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities.  Those estimates and assumptions also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses, the fair value of financial instruments,  the valuation of foreclosed real estate, valuation of goodwill, valuation of deferred tax assets and the liability related to post-retirement benefits.

Concentrations of Credit Risk

The Corporations’ banking activities include granting commercial, residential, and consumer loans to customers primarily located in central and south central Tennessee and Northern Alabama.  The Corporation is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions.  Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus allowance for loan losses and total capital are not exceeded.  At December 31, 2013 our concentrations of commercial real estate, rental and leasing loans were 119.6% of Tier 1 Capital plus the allowance for loan and lease losses, respectively.  Health care and social assistance loans were 46.3%.  Manufacturing and construction loans were 25.4%.  Wholesale trade credits were 25.2%.  These percentages are within our internally established limits regarding concentrations of credit.

 9

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

 Loans secured by non-farm, non-residential real estate comprised 29.0% of the loan portfolio at December 31, 2013.  Management remains comfortable with the real estate exposure levels within the commercial loan portfolio.  Management believes the commercial real estate portion remains well diversified across several different property types and several different geographic markets, stretching primarily from Davidson County, Tennessee to northern Alabama.

Cash and Due From Banks

Included in cash and due from banks are reserve amounts that are required to be maintained in the form of cash and balances due from the Federal Reserve Bank and other banks.  At December 31, 2013, the Bank’s required reserve was $2,560 at the Federal Reserve.  From time to time throughout the year, the Bank’s balances due from other financial institutions exceeded Federal Deposit Insurance Corporation (FDIC) insurance limits.  The Bank had one account over the limit at December 31, 2013 and it was $261.  Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. 

Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents include cash on hand, cash due from banks and federal funds sold.  Federal funds are sold for one-day periods. 

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Corporation does not intend to sell a debt security, and it is more likely than not the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.  For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections. 

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

10

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

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased commercial loans are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments. 

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is established through provisions for loan and lease losses charged against income.  Loan losses are charged against the allowance when management determines that the uncollectibility of a loan has been confirmed.  Subsequent recoveries, if any, are credited to the allowance account in the period received.

The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporation’s Board of Directors.  The Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation.  This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.

A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to the Corporation, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due. 

11

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

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 (4 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.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.  Gains and losses on loan sales are recorded in noninterest income.  The Corporation does not retain servicing rights on loans sold.  Loans held for sale at December 31, 2013 and 2012 totaled $327 and $2,456, respectively.

Other Real Estate

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

When foreclosed properties are acquired current appraisals are obtained on the properties.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected selling costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 24 months. 

Premises and Equipment

            Premises and equipment are stated at cost, less accumulated depreciation and amortization.  The provision for depreciation is computed principally on an accelerated method over the estimated useful life of an asset, which ranges from 15 to 39 years for buildings and from three to 25 years for equipment.  Costs of major additions and improvements are capitalized.  Expenditures for maintenance and repairs are charged to operations as incurred.  Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems.  The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.  At December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock totaled $3,879.

Goodwill

Goodwill is evaluated annually for impairment.  Quantitative and qualitative assessments are performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill.  If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.

12

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

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

The Corporation files consolidated income tax returns with its subsidiaries.  The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Corporation determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.  Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.  With a few exceptions, the Corporation is no longer subject to U.S. federal tax examinations for years before 2010, and state and local tax examinations by tax authorities for years before 2010.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.

Securities Sold Under Agreements to Repurchase

            Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date.  Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction

Fair Value Measurements

            FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements.  See Note 13 – Fair Value Measurement.  In general, fair values of financial instruments are based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as input, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

13

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

Shareholders’ Equity and Earnings Per Share

Basic earnings per share represent income available to shareholders divided by the weighted average number of shares of Corporation common stock outstanding during the period.  Diluted earnings per share reflect additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued, as well

as any adjustment to income that would result from the assumed conversion.  For the years ended December 31, 2013, 2012 and 2011, there were no potentially dilutive shares of common stock issuable.

In 2013, the Corporation adopted a plan to repurchase shares of its common stock.  The plan allowed the purchase of up to 200,000 shares.  The Corporation purchased 158,988 shares in 2013.  In 2012, the Corporation adopted a plan to repurchase up to 150,000 shares of common stock .  The Corporation repurchased 150,000 shares in 2012.  For 2011, the Corporation adopted a similar plan allowing it to repurchase up to 100,000 shares of common stock.  The Corporation repurchased 100,000 shares in 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income tax expenses or benefits.  Other comprehensive (loss) income includes unrealized appreciation or depreciation on available-for-sale securities and changes in the net actuarial gain or loss of the postretirement benefit obligation.

The components of accumulated other comprehensive income (loss), included in shareholder’s equity, are as follows as of December 31, 2013, 2012 and 2011:

	Years Ended December 31,
	2013		2012		2011
Net unrealized gains (losses)
on available-for-sale securities	$	(17,178)	$	5,747	$	4,914
Net actuarial gain on unfunded portion
of postretirement benefit obligation	2,542		2,920		302
	(14,636)		8,667		5,216
Tax effect - (expense) benefit	5,635		(3,337)		(2,008)
Other comprehensive income (loss)	$	(9,001)	$	5,330	$	3,208

Transfers Between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.

Segment Reporting

Management analyzes the operations of the Corporation assuming one operating segment, community lending services.

Recent Accounting Pronouncements

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Corporation on January 1, 2013 and did not have a significant impact on the Corporation’s financial statements. See Note 2 – Other Comprehensive Income (Loss).

14

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

ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists (Topic 740-10) – a consensus of the FASB Emerging Issues Task Force.”  ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists.  The objective is to eliminate diversity in practice resulting from a lack of guidance on this topic.  ASU 2013-11 will be effective for the Corporation after December 15, 2013 and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2013-12, “Definition of a Public Business Entity – An Addition to the Master Glossary” amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP.  The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to business entities.  The amendment does not affect existing requirements, but instead improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance.  There is no actual effective date for the amendment in this Update.  However, the term public business entity will be used beginning with ASU 2014-01.  ASU 2013-12 is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” clarifies when an in substance repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The new update requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The update 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.

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 December 31, 2013, 2012 and 2011, were as follows:

												Affected Line Item in the Statements of Income
	Amounts Reclassified from AOCI
	Years Ended
	December 31, 2013				December 31, 2012			December 31, 2011
Unrealized gains (losses) on available-for-sale securities	$	829			$	2,294		$	1,458			Realized gain (loss) on sale of securities
	(319)				(883)			(561)				Tax (expense) benefit
	$		510		$	1,411		$		897		Net reclassified amount
Amortization of defined benefit pension items
Actuarial gains (losses)	$		(190)		$	-		$		205
	73				-			(79)				Tax (expense) benefit
	$		(117)		$		-	$			126	Net reclassified amount
Total reclassifications out of AOCI	$			393	$		1,411	$	1,023

NOTE 3 – SECURITIES

15

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

                The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are summarized as follows:

	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
	Amortized			Gross Unrealized				Fair
December 31, 2012	Cost			Gains		Losses		Value
Available-for-sale securities
U.S. Government agencies	$		143,897	$	400	$	280	$	144,017
U.S. Government sponsored agency mortgage backed securities	131,917			1,856		55		133,718
States and political subdivisions	47,273			3,306		-		50,579
Corporate bonds	16,884			529		9		17,404
	$	339,971		$	6,091	$	344	$	345,718
Held-to-maturity securities
States and political subdivisions	$	31,755		$	1,665	$	-	$	33,420

            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 December 31, 2013 and 2012 was approximately $269,691 and $83,579, which was approximately 75% and 22%, respectively, of the Corporation’s available-for-sale and held-to-maturity investment portfolio.  The Corporation evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of December 31, 2013 and December 31, 2012 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 December 31, 2013 and 2012:

	Less than 12 months		12 months or Greater		Total
December 31, 2013	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$   100,533	$        7,330	$       4,539	$           461	$ 105,072	$        7,791
US 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
	Less than 12 months		12 months or Greater		Total
December 31, 2012	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$     68,979	$           280	$              -	$                -	$   68,979	$           280
US Government sponsored agency mortgage
backed securities	12,881	55	-	-	12,881	55
Corporate bonds	1,719	9	-	-	1,719	9
	$     83,579	$           344	$              -	$                -	$   83,579	$           344

16

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

The unrealized losses on the Corporation’s investments in direct obligation of U.S. government agencies and U.S. government sponsored agency mortgage backed securities were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, 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
December 31, 2013	Amortized	Estimated	Amortized	Estimated
	Cost	Fair Value	Cost	Fair Value
Within one year	$      5,841	$        5,920	$     3,135	$         3,208
One to five years	26,404	26,489	7,043	7,305
Five to ten years	131,468	124,308	16,554	16,953
After ten years	15,134	15,574	1,107	1,129
Mortgage-backed securities	168,045	157,423	-	-
Total	$  346,892	$    329,714	$   27,839	$       28,595

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $210,494 at December 31, 2013 and $210,800 at December 31, 2012.

The book value of securities sold under agreements to repurchase amounted to $34,978 and $26,500 at December 31, 2013 and 2012, respectively.

Gross gains of $1,026, $2,455and $1,509 resulting from sales of available-for-sale securities were realized for at December 31, 2013, 2012 and 2011, respectively.  A loss of $197 was included in the net gain of $829 for December 31, 2013.  A loss of $161 was included in the net gain of $2,294 for December 31, 2012.  Losses of $51 were included in the net gain of $1,458 for December 31, 2011.

NOTE 4 – LOANS

The following table presents the Bank’s loans by category as of December 31, 2013 and 2012:

	December 31, 2013		December 31, 2012
Commercial
Commercial and industrial	$	94,702	$	83,631
Non-farm, nonresidential real estate	176,213		167,565
Construction and development	29,938		36,323
Commercial loans secured by real estate	26,940		23,983
Other commercial	26,582		24,423
Total commercial	354,375		335,925
Residential
Consumer loans	10,957		11,621
Single family residential	213,763		196,349
Other retail	27,671		23,264
Total residential and consumer	252,391		231,234
	$	606,766	$	567,159
Less:
Allowance for possible loan losses	(8,595)		(8,809)
Total net loans	$	598,171	$	558,350

17

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

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 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 the borrower’s ability to operate profitably and prudently expand its business.  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 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 December 31, 2013, approximately seventy percent of the outstanding principal balance of the Corporation’s commercial real estate loans was secured by owner-occupied properties, compared to eighty percent at December 31, 2012.

With respect to loans to developers and builders 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 due to 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 residential and consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer 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.

18

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

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.

The goal of the bank 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.  A concentration of credit occurs when obligations, direct or indirect, of the same or affiliated interests represent 15 percent or more of the Bank’s capital structure.  Commercial real estate rental and leasing represented the highest concentration at 120% of tier 1 capital.  The Board of Directors recognizes that the Bank’s geographic trade area imposes some limitations regarding loan diversification if the bank is to perform the function for which it has been chartered.  Specifically, lending to qualified borrowers within the bank’s trade area will naturally cause concentrations of real estate loans in the primary communities served by the bank and loans to employees of major employers in the area.

             The following table provides details regarding the aging of the Bank’s loan portfolio:

December 31, 2013	30 - 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans
Retail
Consumer	$	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 estate	38		178		216		26,724		26,940
All 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
December 31, 2012	30 - 89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Past Due		Current		Total Loans
Retail
Consumer	$	112	$	7	$	119	$	11,502	$	11,621
Single family residential	3,543		387		3,930		192,419		196,349
Other retail	193		-		193		23,071		23,264
Retail total	$	3,848	$	394	$	4,242	$	226,992	$	231,234
Commercial
Commercial and industrial	$	618	$	1,457	$	2,075	$	81,556	$	83,631
Non-farm, non-residential real estate	666		448		1,114		166,451		167,565
Construction and development	160		-		160		36,163		36,323
Commercial loans secured by real estate	22		193		215		23,768		23,983
All other commercial	741		1,379		2,120		22,303		24,423
Commercial total	$	2,207	$	3,477	$	5,684	$	330,241	$	335,925
Total	$	6,055	$	3,871	$	9,926	$	557,233	$	567,159

19

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

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

The following table summarizes the impaired loans by loan type as of December 31, 2013 and 2012:

December 31, 2013	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest A ccrued
Commercial
Commercial and industrial	$		2,190	$		1,338	$	234	$	1,572		$	16		$	1,620		$	23		$	134
Non-farm, non-residential real estate	3,236			1,155			1,551		2,706			282			2,819			157			168
Construction and development	461			461			-		461			44			556			30			30
Other commercial	3,834			3,310			178		3,488			-			3,704			225			241
Commercial total	9,721			6,264			1,963		8,227			342			8,699			435			573
Retail
Single family residential	1,121			568			419		987			118			1044			52			55
Other retail	11			-			11		11			11			11
Retail total	1,132			568			430		998			129			1,097			52			55
Total	$		10,853	$		6,382	$	2,393	$	9,225		$	471		$	9,796		$	487		$	628
December 31, 2012	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$		2,036	$		1,076	$	328	$	1,404		$	103		$	3,483		$	74		$	259
Non-farm, non-residential real estate	3,613			2,417			-		2,417			-			1,606			83			78
Construction and development	682			-			682		682			118			682			35			40
Other commercial	3,124			3,124			-		3,124						3,520			126			279
Commercial total	9,455			6,617			1,010		7,627			221			9,291			318			656
Retail
Single family residential	1,237			402			613		1,015			82			638			39			64
Retail total	1,237			402			613		1,015			82						39			64
Total	$	10,692		$	7,019		$	1,623	$	8,642		$	303		$	9,291		$	357		$	720
December 31, 2011	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$	5,839		$	738		$	5,678	$	5,446		$	601		$	5,069		$	193		$	337
Non-farm, non-residential real estate	4,378			2,986			2,115		4,573			307			5,232			35			70
Construction and development	870			-			870		870			203			941			39			45
Other commercial	3,238			-			-		1,498			-			1,527			190			310
Commercial total	14,325			3,724			8,663		12,387			1,111			12,769			457			762
Retail
Single family residential	1,388			142			1,075		1,217			131			1,269			44			68
Retail total	1,388			142			1,075		1,217			131			1,269			44			68
Total	$	15,713		$	3,866		$	9,738	$		13,604	$		1,242	$		14,038	$		501	$	830

* Interest income received is recognized interest income and approximates cash basis.

20

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

            Non-accrual loans, segregated by class of loans, were as follows at December 31, 2013 and 2012:

	2013		2012
Commercial and industrial	$	1,649	$	1,595
Nonfarm, nonresidential real estate	737		1,372
Construction and development	68		50
Commercial real estate	6		126
Other commercial	1,248		1,379
Consumer	21		11
Single family residential	1,667		3,541
Total	$	5,396	$	8,074

Included in certain loan 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 and/or interest payments, regardless of the period of the modification.  All of the loans identified as troubled debt restructuring were modified due to 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 determined 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.

As of December 31, 2013, the Corporation did not have any commitments to extend additional funds to borrowers with loans modified and included as a troubled debt restructuring.

During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012:

		2013					2012
		Post - Modification		Net Charge-offs			Post -Modification		Net Charge-offs
	Number of	Outstanding		Resulting from		Number of	Outstanding		Resulting from
(dollars in thousands)	Loans	Balance		Modifications		Loans	Balance		Modifications
Commercial:
Commercial and industrial	-	$	-	$	-	1	$	8	$	-
Nonfarm nonresidential	-	-		-		1	361		-
Retail:
Consumer	3	8		-		1	3		-
Single family residential	3	167		6		3	237		-
Total trouble debt restructurings	6	$	175	$	6	6	$	609	$	-

21

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

Loans retain their accrual status at the time of their modification.  As a result, if a loan is on nonaccrual status at the time it is modified, it stays as no-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 losses 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 or transferred to nonaccrual. 

As of December 31, 2013 and 2012, the Corporation did not have any loans that were modified in troubled debt restructurings during the past twelve months that have subsequently defaulted. 

Credit Quality Indicators. As part of the on-going 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 commercials loans.  Loans are graded on a scale of 1 – 8.  A description of the general characteristics of the 8 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 its 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.

• Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade A or higher.

• A cash secured loan with the cash on deposit in our bank 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.

• Borrower has a strong market position in its industry and has an abundance of financeable assets available to protect the bank’s position.

• Proven and steady management with good management succession.

• Borrower can withstand major market instabilities of short duration.

• Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade BAA or higher.

22

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

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.

• Liquidity and leverage is in line with industry norms.

• Good management with acceptable management succession.

• Under most economic and business conditions 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.

• 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; divorce, or health condition of the owner or key management person.  The Risk Rating 5 category may be used in transitional upgrades as well as transitional downgrades of credit relationships.  Under these criteria, the risk rating 5 necessitates a plan of action to either upgrade the credit to a Pass rating (Risk Rating 1-4), downgrade the credit to a criticized asset, or exit the relationship within six months.

23

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

B) Ongoing Supervision Warranted - This risk rating 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 the Pass / Watch risk rating, 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 Pass / Watch rating can be eliminated or effectively mitigated.

• Borrowers 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 bank’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.

• Management is of good character although some management weakness may exist, including lack of depth or succession.

• Borrowers generally have 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:

• Cash flow may not be sufficient to fund anticipated cash needs.

• Sufficiently or modestly sufficiently financeable assets are available to protect the bank’s position.

• Adverse trends in operations/profits or unbalanced position in the 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.

• Business exhibits a deteriorating market position in the industry.

• 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 bank will sustain some loss if the deficiencies are not corrected.

24

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

General Characteristics:

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

• 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 deficiencies are not corrected.

• Cash flow is generally not sufficient to fund anticipated cash needs.

• Financeable assets may not be sufficient to protect the bank’s position.

• Adverse trends in 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.

• 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 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 an adequate secondary source of repayment on a best-case basis.

• Borrowers have 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 proposed merger or acquisition; liquidation procedures; capital injections; perfecting liens on additional collateral; and refinancing plans.

• Cash flow is insufficient to fund cash needs.

• Financeable assets are insufficient to protect the bank’s position.

• 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.

The following table presents risk grades and classified loans by class for year ending December 31, 2013 and 2012:

December 31, 2013
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial and Industrial		Non-Farm, Non- Residential Real Estate Loans		Construction and Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial 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

25

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

Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		10,9366	$	212,096	$	27,643	$	250,675
Nonperforming*	21			1,667		28		1,716
TOTALS	$	10,957		$	213,763	$	27,671	$	252,391

December 31, 2012
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial  and Industrial			Non-Farm, Non- Residential Real Estate Loans		Construction and  Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial Loan Totals
Pass	$		81,560	$	164,290	$	35,543	$	21,660	$	22,857	$	325,910
Special Mention	269			815		98		398		-		1,580
Substandard	726			2,460		682		1,925		187		5,980
Doubtful	1,076			-		-		-		1,379		2,455
TOTALS	$		83,631	$	167,565	$	36,323	$	23,983	$	24,423	$	335,925
Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		11,610	$	192,808	$	23,131	$	227,549
Nonperforming*	11			3,541		133		3,685
TOTALS	$	11,621		$	196,349	$	23,264	$	231,234

*Loans are classified as nonperforming loans and are automatically placed on nonaccrual status once they reach 90 days past due.  For purposes of this table all loans graded substandard or below are including in nonperforming.

**Single-family residential loans includes primary liens, closed-end secondary liens, residential construction loans, and home equity lines of credit.

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible 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 allowance for possible loan

loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.”  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 allowance for possible loan losses is designed to account for credit deterioration as it occurs.  The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.  The provision for possible 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 allowance for possible loan losses 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. 

26

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

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, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Corporation’s allowance for possible loan losses 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 similar 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.  Commercial 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 a calculated grade of 7 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 allowance for possible loan losses 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 periodically updated 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 the total dollar amount 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 allowance for loan and lease losses (“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.

The allowance for loan losses 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, know 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 Corporation uses a rolling eight quarters historic loss period for all segments when estimating the historic charge off rates calculated in accordance with ASC Topic 450 and incorporates environmental factors for various components such as economic conditions, trends in delinquencies, loan review assessments, credit concentrations and level of underperforming ratios. 

27

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

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.  In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of the Corporation’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan

portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of changes to interest rates on portfolio risk.  Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.  Each component is determined to have either a high, moderate or low degree of risk.  The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

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.

Loans identified as losses by management and internal loan review are charged-off.  Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

The following table summarizes the allocation in the allowance for loan losses by loan segment for the years ended December 31, 2013, 2012 and 2011: 

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,528	$             1,109	$                   172	$             8,809
Less: Charge-offs	222	27	49	298
Add: Recoveries	53	2	29	84
Add: Provisions	-	-	-	-
Ending Balance	$              7,359	$             1,084	$                   152	$             8,595

December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              6,895	$             2,113	$                   192	$          9,200
Less: Charge-offs	1,690	176	19	1,885
Add: Recoveries	364	2	8	374
Add: Provisions	1,959	(830)	(9)	1,120
Ending Balance	$            7,528	$           1,109	$                  172	$          8,809

December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,011	$             2,001	$                   408	$            9,420
Less: Charge-offs	3,353	52	147	3,552
Add: Recoveries	103	-	104	207
Add: Provisions	3,134	164	(173)	3,125
Ending Balance	$              6,895	$             2,113	$                   192	$            9,200

The following tables detail the amount of the ALLL allocated to each portfolio segment as of December 31, 2013, 2012 and 2011, disaggregated on the basis of the Corporation’s impairment methodology:

28

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

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               342	$                118	$                    11	$              471
Loans collectively evaluated for impairment	7,017	966	141	8,124
Ending Balance	$            7,359	$             1,084	$                  152	$           8,595
December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               221	$                  82	$                      -	$              303
Loans collectively evaluated for impairment	7,307	1,027	172	8,506
Ending Balance	$            7,528	$             1,109	$                  172	$           8,809
December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$            1,111	$                131	$                      -	$           1,242
Loans collectively evaluated for impairment	5,784	1,982	192	7,958
Ending Balance	$            6,895	$             2,113	$                  192	$           9,200

The following table shows loans as of December 31, 2013, 2012 and 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Bank’s impairment methodology:

December 31, 2013	Commercial			Residential Real Estate		Consumer & 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
December 31, 2012	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		7,627	$	1,015	$	-	$	8,642
Loans collectively evaluated for impairment	328,298			195,334		34,885		558,517
Ending Balance	$		335,925	$	196,349	$	34,885	$	567,159
December 31, 2011	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		12,387	$	1,217	$	-	$	13,604
Loans collectively evaluated for impairment	268,536			221,365		14,297		504,198
Ending Balance	$	280,923		$	222,582	$	14,297	$	517,802

NOTE 6 – PREMISES AND EQUIPMENT

The following table presents the Corporation’s assets by category at December 31, 2013 and 2012: 

	2013		2012
Land	$	8,223	$	9,003
Premises	22,765		22,717
Furniture and equipment	9,367		9,401
Leasehold improvements	1,095		1,319
	41,450		42,440
Less allowance for depreciation and amortization	(16,582)		(16,023)
	$	24,868	$	26,417

29

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

NOTE 7 – RELATED PARTY TRANSACTIONS

            Certain related parties (primarily directors and senior officers of the Corporation or the Bank, including their affiliates, families and companies in which they hold 10% or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business.  An analysis of the activity with respect to such loans for

the years ended December 31, 2013 and 2012 is shown in the table below (dollars in thousands).  These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank had a relationship other than the association of one of its directors in the capacity of officer or director.  These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons.  They did not involve more than the normal risk of collectability or present other unfavorable features.  No related party loans were charged off in 2013 or 2012.

            Activity for related party transactions during 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Related party extensions of credit, beginning of period	$	3,831	$	3,829
New loans	1,116		745
Repayments	(1,125)		(743)
Related party extension of credit, end of period	$	3,822	$	3,831

The aggregate balances of related party deposits at December 31, 2013 and 2012 were $15,724 and $15,984, respectively.

The aggregate balances of related party repurchase agreements at December 31, 2013 and 2012 were $9,079 and $8,694, respectively.

The Corporation and Bank utilize various services and purchased good provided by certain related parties. Significant services provided by a director during 2013 totaled $38, which was for consulting services.  For 2012, these services totaled $1,105, which was for building contractor services.

NOTE 8 – LEASES

            Real property for four of the Bank’s office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2028.  In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms.  In addition, various items of office equipment are leased under cancelable operating leases.  Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to approximately $18, $12 and $13 for equipment leases and approximately $264, $283 and $236 for building leases in 2013, 2012 and 2011, respectively.  Future minimum lease commitments as of December 31, 2013 under all noncancelable operating leases with initial terms of one year or more are shown in the following table: 

Year	Lease Payments
2014	$                         336
2015	347
2016	320
2017	290
2018	290
Thereafter	3,942
Total	$                     5,525

NOTE 9 – FEDERAL AND STATE INCOME TAXES

30

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

                The following table presents components of income tax expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011:

	2013		2012		2011
Current	$	915	$	2,256	$	1,960
Deferred	1,950		(340)		(1,216)
Total provision for income taxes	2,865		1,916		744
Deferred Tax Effects of Principal Temporary Differences	2013		2012		2011
Allowance for possible loan losses	$	3,309	$	3,392	$	3,519
Deferred compensation	2,516		2,420		2,234
Write down of other real estate	314		1,152		1,621
Deferred gain on OREO sale	188		202		-
Amortization of core deposit intangible	(272)		423		575
Recognition of nonaccrual loan income	111		152		66
Unrealized gains (losses) on available-for-sale securities	6,613		(2,212)		(1,892)
Post retirement benefit obligation	1,849		1,733		1,643
Accelerated depreciation	(822)		(630)		(562)
Amortization of goodwill	(2,591)		(2,376)		(2,152)
Alternative Minimum Tax	-		402		422
Dividend Income - F&M West	(372)		(219)		(241)
Prepaid Expenses	(178)		(185)		-
Other	(304)		(368)		(360)
Net deferred tax asset	$	10,905	$	3,884	$	4,872
Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)	2013		2012		2011
Tax expense at statutory rate	$	4,332	$	3,238	$	2,632
Increase (decrease) in taxes resulting from:
Tax exempt interest	(1,144)		(1,275)		(1,533)
Nondeductible interest expense	18		29		45
Employee benefits	(196)		(240)		(244)
Other nondeductible expenses
(nontaxable income) - net	11		32		55
State income taxes net of federal tax benefit	-		41		(40)
Dividend income exclusion	-		(1)		(52)
Other	(156)		92		(119)
Total provision for income taxes	$	2,865	$	1,916	$	745
Effective tax rate	22.4%		20.1%		9.6%

31

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

The Corporation and one of its subsidiaries file consolidated income tax returns with the Internal Revenue Service and State of Tennessee.  The Corporation is not subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.  There was no valuation allowance for deferred tax assets at December 31, 2013 and 2012.  Management believes it is more-likely-than-not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years. 

NOTE 10 – BORROWED FUNDS

The Bank is a party to the Blanket Agreement for Advances and Security Agreement (the “Blanket Agreement”) with the Federal Home Loan Bank of Cincinnati (the “FHLB”).  Advances made to the Bank under the Blanket Agreement are collateralized by the FHLB stock and qualifying residential mortgage loans totaling 150% of the outstanding amount borrowed.  These collateralization matters are outlined in the Blanket Agreement dated June 20, 2006 between the Bank and the FHLB.  Outstanding advances at December 31, 2013 and 2012 were $0 and $10,100, respectively.

Stock held in the FHLB totaling $3,009 at December 31, 2013 is carried at cost.  The stock is restricted and can only be sold back to the FHLB at par.

The Bank has a Cash Management Advance Line of Credit Agreement (the “CMA”) dated June 21, 2010, with the Federal Home Loan Bank.  The CMA is a component of the Blanket Agreement.  The purpose of the CMA is to assist with short-term liquidity management.  Under the terms of the CMA, the Bank 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 December 31, 2013.

Short-term borrowings included the following at December 31:

	2013	2012
Securities sold under repurchase agreements	$       18,095	$       17,068

Securities sold under agreements to repurchase consist of obligations of the Bank to other parties.  The obligations are secured by investment securities and such collateral is held by in safekeeping by a third party.  The maximum amount of outstanding agreements at any month end during 2013 and 2012 totaled $22,359 and $22,598, respectively, and the monthly average of such agreements totaled $19,052 and $18,657 for 2013 and 2012, respectively.  The agreements at December 31, 2013, mature January 2, 2014.

NOTE 11 – SIGNIFICANT ESTIMATES, COMMITMENTS AND CONTINGENCIES

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in the footnote regarding loansOther significant estimates and concentrations not discussed in those footnotes include:

General Litigation

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Corporation.

Pension and Other Postretirement Benefit Obligations

32

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

The Corporation has a noncontributory defined benefit postretirement health care plan whereby it agrees to provide certain postretirement benefits to eligible employees.  The benefit obligation is the actuarial present value of all benefits attributed to service rendered prior to the valuation date based on the projected unit credit cost method.  It is reasonably possible that events could occur that would change the estimated amount of this liability materially in the near term.

Current Economic Conditions

The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. 

The accompanying financial statements have been prepared using values and information currently available to the Corporation.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.  Furthermore, the Corporation’s regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Corporation’s measurement of regulatory capital and compliance with the capital adequacy guidelines under the regulatory framework for prompt corrective action.

Commitments and Credit Risk

The Corporation grants agribusiness, commercial and residential loans to customers throughout the state.  The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.

Commitments to Originate Loans

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Mortgage loans in the process of origination represent amounts that the Corporation plans to fund within a normal period of 30 to 90 days, and which are intended for sale to investors in the secondary market.  Total mortgage loans in process of origination were $407and $9,488, at December 31, 2013 and 2012, respectively.  Total mortgage loans held for sale amounted to $327 and $2,456, at December 31, 2013 and 2012, respectively.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under nonfinancial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  Should the Corporation be obligated to perform under the standby letters of credit, the Corporation may seek recourse from the customer for reimbursement of amounts paid.

The Corporation had total outstanding standby letters of credit amounting to $11,384 and $9,070, at December 31, 2013 and 2012, respectively, with terms ranging from seven days to 23 years. 

33

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

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Lines of credit generally have fixed expiration dates.  Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2013, the Corporation had granted unused lines of credit to borrowers aggregating approximately $79,150 and $44,318 for commercial lines and open-end consumer lines, respectively.  At December 31, 2012, unused lines of credit to borrowers aggregated approximately $64,455 for commercial lines and $45,302 for open-end consumer lines.

NOTE 12 – REGULATORY MATTERS

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

            Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Capital and Tier I Capital to risk-weighted assets and of Tier I Capital to average assets.  Actual capital amounts and ratios are presented in the table below (dollars in thousands).  Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.

				For Minimum Capital			For Minimum Regulatory
(Dollars in Thousands)	Actual			Adequacy Purposes			Compliance Purposes
As of December 31, 2013	Amount		Ratio	Amount		Ratio > or =	Amount		Ratio > or =
Total Capital (to Risk Weighted
Assets)   Consolidated	$	110,276	15.3 %	$	57,632	8.0 %	$	-	-
Bank	107,392		15.0 %	57,248		8.0 %	71,560		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	101,681		14.1 %	28,816		4.0 %	-		-
Bank	98,797		13.8 %	28,624		4.0 %	42,936		6.0%
Tier I Capital (to Average
Assets)   Consolidated	101,681		9.4 %	43,358		4.0 %	-		-
Bank	98,797		9.1 %	43,358		4.0 %	54,198		5.0%
As of December 31, 2012
Total Capital (to Risk Weighted
Assets)   Consolidated	$	109,011	15.8 %	$	55,265	8.0 %	$	-	-
Bank	106,075		15.5 %	54,890		8.0 %	68,613		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	100,338		14.5 %	27,603		4.0 %	-		-
Bank	97,402		14.2 %	27,418		4.0 %	41,127		6.0%
Tier I Capital (to Average
Assets)   Consolidated	100,338		9.7 %	41,505		4.0 %	-		-
Bank	97,402		9.4 %	41,492		4.0 %	51,865		5.0%

34

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

The Corporation is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At December 31, 2013, approximately $15,022 of retained earnings were available for dividend declaration without prior approval.

NOTE 13 – FAIR VALUE MEASUREMENT

The fair value of an asset or liability is the price that would be received to sell 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.

Recurring Measurements

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012, and by the level within the fair value hierarchy utilized to measure fair value:

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
December 31, 2012
Available-For-Sale Securities	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	-	$	144,017	$	-	$	144,017
U.S. government sponsored agency mortgage backed securities	-		133,718		-		133,718
States and political subdivisions	-		50,579		-		50,579
Corporate bonds	-		17,404		-		17,404
Total assets at fair value	$	-	$	345,718	$	-	$	345,718

The following 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 have been no significant changes in the valuation techniques during the year ended December 31, 2013. 

35

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

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 bond’s 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 December 31, 2013 and December 31, 2012, by the level within the fair value hierarchy utilized to measure fair value:

Assets measured at fair value on a nonrecurring basis as of December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	2,214	$	2,214
Other real estate owned	-		-		208		208
Assets measured at fair value on a nonrecurring basis as of December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	4,840	$	4,840
Other real estate owned	-		-		3,385		3,385

Impaired Loans (Collateral-Dependent)

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 in the environment 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 were approximately $79 at December 31, 2013 and $3,300 at December 31, 2012.

            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 creditor 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 partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value.

Other Real Estate Owned

36

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

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.  Fair value adjustments were approximately $395 at December 31, 2013 and $1,200 at December 31, 2012.

            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.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements as of December 31, 2013 and 2012:

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2013	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	2,214	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	208	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2012	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	4,840	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	3,385	Market comparable properties	Marketability 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 is 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 funds sold – 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.

37

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

Loans (net of the allowance for loan  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.

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.

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 tables present estimated fair values of the Corporation’s financial instruments as of December 31, 2013 and 2012, and indicate the levels within the fair value hierarchy of the valuation techniques:

Fair Value Measurements at December 31, 2013 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs   (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		-		778,682		-
Repurchase agreements	18,095		-		18,095		-
Accrued interest payable	663		-		663		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

38

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

Fair Value Measurements at December 31, 2012 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant O ther Observable Inputs (Level 2)		Significant Unobservable Inputs   (Level 3)
Financial assets
Cash and due from banks	$	23,443	$	23,443	$	-	$	-
Interest-bearing deposits in other banks	31,953		31,953		-		-
Federal funds sold	15,000		15,000		-		-
Federal Home Loan Bank and Federal Reserve Bank stock	3,879		-		3,879		-
Securities available-for-sale	345,718		-		345,718		-
Securities held-to-maturity	31,755		-		33,420		-
Loans held for sale	2,456		2,456		-		-
Loans, net	558,350		-		-		572,277
Accrued interest receivable	4,060		-		4,060		-
Financial liabilities
Non-interest bearing deposits	169,136		169,136		-		-
Interest bearing deposits	763,713		-		766,043		-
Repurchase agreements	17,068		-		17,068		-
Advances from Federal Home Loan Bank	10,100		-		10,215		-
Accrued interest payable	754		-		754		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following table presents unaudited quarterly interim financial information for the Corporation for the years ended December 31, 2013 and 2012:  

	First	Second	Third	Fourth
2013	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,223	$        9,523	$         9,328	$        9,287	$      37,361
Interest expense	834	751	679	643	2,907
Net interest income	8,389	8,772	8,649	8,644	34,454
Provision for possible loan losses, net	-	-	-	-	-
Noninterest income	3,329	2,620	2,509	2,658	11,116
Noninterest expenses	8,105	8,165	8,322	8,237	32,829
Income before income taxes	3,613	3,227	2,836	3,065	12,741
Income taxes	557	842	779	687	2,865
Net income	$        3,056	$        2,385	$         2,057	$        2,378	$        9,876
Basic earnings per share	0.59	0.46	0.40	0.47	1.93
Weighted average shares outstanding per quarter	5,178,759	5,133,051	5,086,469	5,046,833	5,110,849
	First	Second	Third	Fourth
2012	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,065	$        9,095	$         9,114	$        9,110	$      36,384
Interest expense	1,071	979	917	874	3,841
Net interest income	7,994	8,116	8,197	8,236	32,543
Provision for possible loan losses, net	600	520	-	-	1,120
Noninterest income	3,379	3,360	2,276	2,616	11,631
Noninterest expenses	7,754	8,424	8,145	9,207	33,530
Income before income taxes	3,019	2,532	2,328	1,645	9,524
Income taxes	690	451	373	402	1,916
Net income	$        2,329	$        2,081	$         1,955	$        1,243	$        7,608
Basic earnings per share	0.44	0.39	0.37	0.23	1.43
Weighted average shares outstanding per quarter	5,330,000	5,330,000	5,328,002	5,332,893	5,315,634

39

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

NOTE 15 – DEPOSITS

            The Bank does not have any foreign offices and all deposits are serviced in its 16 domestic offices.  Maturities of time deposits of $100 or more at December 31, 2013 and 2012 are as follows:

	2013	2012
Under 3 months	$     31,514	$       28,504
3 to 12 months	$     63,429	64,639
Over 12 months	$     27,834	27,018
Total	$   122,777	$     120,161

The following table presents maturities of interest-bearing time deposits as of December 31, 2013:

2014	$      185,687
2015	$        25,422
2016	$        14,712
2017	$          7,120
2018	$          5,893
Thereafter	$                -
Total	$      238,834

NOTE 16 – CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

The following tables present the condensed balance sheets, statements of income, comprehensive income, and cash flows of the Corporation as of December 31, 2013 and 2012: 

CONDENSED BALANCE SHEETS

	As of December 31,
	2013		2012
Cash	$	23	$	61
Investment in bank subsidiary	99,695		111,655
Investment in credit life insurance company	54		54
Investment in other securities	17		17
Dividends receivable from bank subsidiary	2,058		1,917
Cash surrender value - life insurance	4,409		4,395
Total assets	$	106,256	$	118,099
Liabilities
Accrued liabilities	$	1,820	$	1,686
Dividends payable	1,858		1,917
Total liabilities	3,678		3,603
Shareholders' equity
Common stock - $10 par value, 8,000,000 shares authorized;
5,021,012 and 5,180,000 shares issued and outstanding,
as of December 31, 2013 and December 31, 2012, respectively	50,210		51,800
Retained earnings	61,369		57,366
Accumulated other comprehensive income (loss)	(9,001)		5,330
Total shareholders' equity	102,578		114,496
Total liabilities and shareholders' equity	$	106,256	$	118,099

40

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

CONDENSED STATEMENTS OF INCOME

	Years ended December 31,
	2013		2012		2011
Operating income
Dividends from bank subsidiary	$	7,663	$	7,289	$	6,974
Other dividend income	15		18		15
Other	65		135		130
Operating expenses	(238)		(218)		(199)
Income before equity in undistributed net
income of bank subsidiary	7,505		7,224		6,920
Equity in undistributed net income of bank subsidiary	2,371		384		76
Net Income	$	9,876	$	7,608	$	6,996

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
	2013		2012		2011
Net Income for common shareholders	$	9,876	$	7,608	$	6,996
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of ($8,507), $1,204, and $2,960	(13,589)		1,923		4,728
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively	(510)		(1,411)		(897)
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively	(232)		1,610		1,940
Other Comprehensive Income (Loss)	(14,331)		2,122		5,771
Total Comprehensive Income (Loss)	$	(4,455)	$	9,730	$	12,767

41

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

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2013		2012		2011
Operating activities
Net income for the year	$	9,876	$	7,608	$	6,996
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary	(2,371)		(384)		(76)
Increase in cash surrender value of life insurance contracts	(65)		(135)		(130)
(Increase) decrease in other assets	(90)		56		(1,972)
Decrease in payables	84		127		126
Total adjustments	(2,442)		(336)		(2,052)
Net cash provided by operating activities	7,434		7,272		4,944
Investing activities
Purchase of single premium life insurance policy	-		(310)		-
Net cash used by investing activities	-		(310)		-
Financing activities
Payment to repurchase common stock	(3,722)		(3,400)		(3,011)
Cash dividends paid	(3,800)		(3,944)		(1,991)
Advance from subsidiary	50		-		-
Net cash used by financing activities	(7,472)		(7,344)		(5,002)
Decrease in cash	(38)		(382)		(58)
Cash at beginning of year	61		443		501
Cash at end of year	$	23	$	61	$	443

NOTE 17 – EMPLOYEE BENEFIT PLANS

            The Bank contributes to a qualified profit-sharing plan covering employees who meet participation requirements.  To be eligible to participate, employees must complete 1,000 hours of service within the twelve month time period following their date of hire.  Employees must be age twenty or older.  The amount of the contribution is at the discretion of the Bank’s Board of Directors, up to the maximum deduction allowed for federal income tax purposes.  Contributions to the plan, which amounted to approximately $1,596, $1,019 and $874 in 2013, 2012 and 2011, respectively, are included in salaries and employee benefits expense.

            The Bank formalized a nonqualified salary continuation plan for certain key officers.  In connection with this plan, the value of the single premium universal life insurance policies (approximately $975 at December 31, 2013 and approximately $963 at December 31, 2012) purchased in 1993 to fund the plan and the related liability (approximately $49 at December 31, 2013 and $59 at December 31, 2012) were included in other assets and other liabilities, respectively.  The principal cost of the plan is accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. 

            The Corporation and Bank implemented a deferred compensation plan that permits directors to defer their director’s fees and earn interest on the deferred amount in the amount of the wall street journal prime rate plus three percent.  The agreements provide for a lump sum payment or 120 month payments of deferred fees plus accrued interest after retirement, separation from service, or death.  The liability accrued for this plan totaled $6,487 and $6,226 at December 30, 2013 and 2012, respectively.  The charge to expense for the agreements was $722, $853 and $711 for the years ended December 31 2013, 2012 and 2011, respectively.    

42

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

NOTE 18 – POST RETIREMENT BENEFIT PLAN

Effective July 1, 2013, the Corporation revised its retiree medical benefit plan for employees who were hired before March 27, 2007. Newly retiring employees will no longer be offered medical, dental or life insurance coverage. Instead, qualified retirees will receive a post retirement bonus. The Corporation will pay a post retirement bonus equal to $20,000 to employees (i) who were hired prior to March 20, 2007; (ii) who retire on or after July 1, 2013; (iii) who are at least age 59 ½ at the time of retirement; and (iv) who have at least twenty-five years of service to the Corporation as of retirement. The bonus will be paid in a lump sum cash payment (subject to applicable tax withholding requirements) within 60 days after the employee’s retirement, provided such retirement constitutes a “separation from service” under section 409A of the Internal Revenue Code. The Corporation still sponsors a defined benefit post-retirement health care plan for retirees who retired prior to July 1, 2007.  Under this plan, premiums paid by retirees and spouses depend on date of retirement, age and coverage election. 

            The Corporation funding policy is to make the minimal annual contribution that is required by applicable regulations, plus such amounts as the Corporation may determine to be appropriate from time to time.  The Corporation expects to contribute $145 to the plan in 2014.

            The following table provides further information about the plan:

	Post-Retirement Benefits
	2013		2012
Change in benefit obligation
Benefit obligation at beginning of year	$	7,421	$	4,572
Service cost	138		91
Interest cost	292		351
Plan participants’ contribution	77		(81)
Expected benefits paid	(343)		(128)
Actuarial (gain) loss	(5,220)		2,616
Amendments	(52)		-
Benefit obligation at end of year	$	2,313	$	7,421
Change in fair value of assets
Fair value of plans assets at beginning of year	$	-	$	-
Employer contribution	77		(209)
Plan participants' contributions	266		(105)
Benefits paid	(343)		(314)
Fair value of plan assets at end of year	$	-	$	-
Reconciliation of funded status to benefit costs recognized
Projected benefit obligation, end of year	$	(2,313)	$	(7,421)
Fair value of assets, end of year	-		-
Funded status, end of year	(2,313)		(7,421)
Unrecognized prior service cost	(52)		-
Unrecognized net loss/(gain)	(2,490)		2,920
Prepaid/(accrued) benefit cost	(4,855)		(4,501)

            Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:

	2013		2012
Unrecognized net actuarial gain/loss	$	2,490	$	2,920
Unrecognized prior service cost	52		-
	$	2,542	$	2,920

Amounts recognized in statement of financial position are as follows:

	2013		2012
Current Liability	$	183	$	266
Noncurrent liability	4,672		4,235
Total	$	4,855	$	4,501

            A reconciliation of other comprehensive income is as follows:

43

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

	Post-Retirement Benefits
	2013		2012		2011
Accumulated other comprehensive income beginning of year	$	2,920	$	305	$	(2,849)
Less: loss/(gain) recognized in current year	(190)		-		205
Plus: loss/(gain) incurred in current year	(136)		2,615		-
Plus: prior service cost established in current year	(52)		-		-
Other comprehensive income/(loss)	(378)		2,615		2,950
Ending balance (before tax effects)	$	2,542	$	2,920	$	305
	Post-Retirement Benefits
Components of net periodic benefit cost:	2013		2012		2011
Service cost	$	138	$	91	$	24
Interest cost	292		351		139
Recognized net actuarial (gain) loss	190		-		(205)
Net periodic benefit cost (income)	$	620	$	442	$	(42)

            The estimated net gain for the defined benefits postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $188.

	Post-Retirement Benefits
Weighted-average assumption used to determine benefit obligation:	2013	2012
Discount rate	5%	4%
Rate of compensation increase	NA	NA

	Post-Retirement Benefits
Weighted-average assumptions used to determine benefit costs:	2013	2012
Discount rate	4%	8%

The following table gives the Health Care Cost Trend, which is applied to gross charges, net claims and retiree paid premiums to reflect the Corporation’s past practice and stated ongoing intention to maintain relatively constant cost sharing between the Corporation and retirees:

Health care trend rate	2013	2012
Initial
Pre-65	11%	11%
Post-65	7.50%	8%
Ultimate (pre and post-65	5.00%	5%
Years to ultimate
Pre-65	6	6
Post-65	5	6

            The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, net of participant contributions:

44

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

FYE	Company Benefits
2014	$         183
2015	167
2016	178
2017	169
2018	191
2019-2025	935
	$      1,823

               Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage-Point Increase	1-Percentage-Point Decrease
Effect on total of service and interest cost	$     29	$  (16)
Effect on postretirement benefit obligation	212	(109)

45

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

EX-21

EXHIBIT 21

List of Subsidiaries

(Direct and Indirect Ownership)

Name	State of Incorporation
First Farmers and Merchants Bank	Tennessee
F & M West, Inc.	Tennessee
Maury Tenn, Inc.	Nevada
Maury Tenn Properties, Inc.	Maryland

EX-31

EXHIBIT 31.1

FIRST FARMERS AND MERCHANTS CORPORATION

CERTIFICATION 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

I, T. Randy Stevens, certify that:

1)	I have reviewed this annual report on Form 10-K of First Farmers and Merchants Corporation;
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date      March 5, 2014	\s\ T. Randy Stevens
	T. Randy Stevens, Chief Executive Officer

 

EX-31

Exhibit 31.2

FIRST FARMERS AND MERCHANTS CORPORATION

CERTIFICATION 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

I, Patricia P. Bearden, certify that:

1)	I have reviewed this annual report on Form 10-K of First Farmers and Merchants Corporation;
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date      March 5, 2014	\s\ Patricia P. Bearden
	Patricia P. Bearden, Treasurer (principal financial officer)

EX-32

EXHIBIT 32.1

FIRST FARMERS AND MERCHANTS CORPORATION

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Farmers and Merchants Corporation (the “Company”) on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)  Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date      March 5, 2014	\s\ T. Randy Stevens
	T. Randy Stevens, Chief Executive Officer

Date      March 5, 2014	\s\ Patricia P. Bearden
	Patricia P. Bearden, Treasurer (principal financial officer)

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Schedule of Capital Adequacy Requirements (Table)

12 Months Ended

Dec. 31, 2013

Schedule of Capital Adequacy Requirements (Table):

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations

Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.

				For Minimum Capital			For Minimum Regulatory
(Dollars in Thousands)	Actual			Adequacy Purposes			Compliance Purposes
As of December 31, 2013	Amount		Ratio	Amount		Ratio > or =	Amount		Ratio > or =
Total Capital (to Risk Weighted
Assets)   Consolidated	$	110,276	15.3 %	$	57,632	8.0 %	$	-	-
Bank	107,392		15.0 %	57,248		8.0 %	71,560		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	101,681		14.1 %	28,816		4.0 %	-		-
Bank	98,797		13.8 %	28,624		4.0 %	42,936		6.0%
Tier I Capital (to Average
Assets)   Consolidated	101,681		9.4 %	43,358		4.0 %	-		-
Bank	98,797		9.1 %	43,358		4.0 %	54,198		5.0%
As of December 31, 2012
Total Capital (to Risk Weighted
Assets)   Consolidated	$	109,011	15.8 %	$	55,265	8.0 %	$	-	-
Bank	106,075		15.5 %	54,890		8.0 %	68,613		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	100,338		14.5 %	27,603		4.0 %	-		-
Bank	97,402		14.2 %	27,418		4.0 %	41,127		6.0%
Tier I Capital (to Average
Assets)   Consolidated	100,338		9.7 %	41,505		4.0 %	-		-
Bank	97,402		9.4 %	41,492		4.0 %	51,865		5.0%

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Non-accrual loans, segregated by class of loans, were as follows (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Non-accrual loans, segregated by class of loans, were as follows
Commercial and industrial Non-accrual loans	$ 1,649	$ 1,595
Nonfarm, nonresidential real estate Non-accrual loans	737	1,372
Construction and development Non-accrual loans	68	50
Commercial real estate Non-accrual loans	6	126
Other commercial Non-accrual loans	1,248	1,379
Consumer Non-accrual loans	21	11
Single family residential Non-accrual loans	1,667	3,541
Total Non-accrual loans	$ 5,396	$ 8,074

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The amortized cost and fair value of securities available-for-sale and held-to-maturity (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Amortized Cost
U.S. Government agencies		$ 143,897
Available for sale securities
U.S. Government agencies		143,897
U.S. Government sponsored agency mortgage backed securities		131,917
States and political subdivisions		47,273
Total available for sale securities	346,892	339,971
Held to maturity securities
States and political subdivisions		31,755
Available for sale securities
U.S. Government sponsored agency mortgage backed securities	168,045
States and political subdivisions	45,237
Corporate bonds	20,747
Held to maturity securities
States and political subdivisions {3}	27,839
Gross Unrealized Gains
U.S. Government agencies		400
Available for sale securities
U.S. Government agencies		400
U.S. Government sponsored agency mortgage backed securities		1,856
States and political subdivisions		3,306
Total available for sale securities	1,547	6,091
Held to maturity securities
States and political subdivisions		1,665
Available for sale securities
U.S. Government sponsored agency mortgage backed securities	27
States and political subdivisions	1,240
Corporate bonds	280
Held to maturity securities
States and political subdivisions {3}	756
Gross Unrealized Losses
U.S. Government agencies		280
Available for sale securities
U.S. Government agencies		280
U.S. Government sponsored agency mortgage backed securities		55
Total available for sale securities	18,725	344
Available for sale securities
U.S. Government sponsored agency mortgage backed securities	10,649
States and political subdivisions	140
Corporate bonds	145
Fair Value
U.S. Government agencies		144,017
Available for sale securities
U.S. Government agencies		144,017
U.S. Government sponsored agency mortgage backed securities		133,718
States and political subdivisions		50,579
Total available for sale securities	329,714	345,718
Held to maturity securities
States and political subdivisions		33,420
Investments in debt securities reported less than their historical cost		83,579
Percentage of Investments in debt securities reported less than their historical cost		75.00%
Available for sale securities
U.S. Government sponsored agency mortgage backed securities	157,423
States and political subdivisions	46,337
Corporate bonds	20,882
Held to maturity securities
States and political subdivisions {3}	28,595
Investments in debt securities reported less than their historical cost	$ 269,691
Percentage of Investments in debt securities reported less than their historical cost	22.00%

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Commitments and contingencies (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Commitments to Originate Loans
Total mortgage loans in process of origination	$ 407	$ 9,488
Total mortgage loans held for sale	327	2,456
Corporation plans to fund within a normal period in Minimum of days	30
Corporation plans to fund within a normal period in Maximum of days	90
Standby Letters of Credit
The Corporation had total outstanding standby letters of credit amounting to	11,384	9,070
Stand by letters of credit days ranging minimum days	7
Stand by letters of credit days ranging maximum years	23
Lines of credit
Corporation had granted unused lines of credit to borrowers aggregating approximately for commercial lines	79,150	64,455
Corporation had granted unused lines of credit to borrowers aggregating approximately for open-end consumer lines	$ 44,318	$ 45,302

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Summary of the impaired loans by loan type (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Unpaid Contractual Principal Balance
Commercial and industrial			$ 5,839
Commercial
Commercial and industrial			5,839
Non-farm, non-residential real estate			4,378
Construction and development			870
Other commercial			3,238
Commercial total			14,325
Retail
Single family residential			1,388
Retail total			1,388
Total impaired loans			15,713
Commercial
Commercial and industrial		2,036
Non-farm, non-residential real estate		3,613
Construction and development		682
Other commercial		3,124
Commercial total		9,455
Retail
Single family residential		1,237
Retail total		1,237
Total impaired loans		10,692
Commercial
Commercial and industrial	2,190
Non-farm, non-residential real estate	3,236
Construction and development	461
Other commercial	3,834
Commercial total	9,721
Retail
Single family residential	1,121
Other retail	11
Retail total	1,132
Total impaired loans	10,853
Recorded investment with no allowance
Commercial and industrial			738
Commercial
Commercial and industrial			738
Non-farm, non-residential real estate			2,986
Commercial total			3,724
Retail
Single family residential			142
Retail total			142
Total impaired loans			3,866
Commercial
Commercial and industrial		1,076
Non-farm, non-residential real estate		2,417
Other commercial		3,124
Commercial total		6,617
Retail
Single family residential		402
Retail total		402
Total impaired loans		7,019
Commercial
Commercial and industrial	1,338
Non-farm, non-residential real estate	1,155
Construction and development	461
Other commercial	3,310
Commercial total	6,264
Retail
Single family residential	568
Retail total	568
Total impaired loans	6,382
Recorded Investment with allowance
Commercial and industrial			5,678
Commercial
Commercial and industrial			5,678
Non-farm, non-residential real estate			2,115
Construction and development			870
Commercial total			8,663
Retail
Single family residential			1,075
Retail total			1,075
Total impaired loans			9,738
Commercial
Commercial and industrial		328
Construction and development		682
Commercial total		1,010
Retail
Single family residential		613
Retail total		613
Total impaired loans		1,623
Commercial
Commercial and industrial	234
Non-farm, non-residential real estate	1,551
Other commercial	178
Commercial total	1,963
Retail
Single family residential	419
Other retail	11
Retail total	430
Total impaired loans	2,393
Total Recorded Investment
Commercial and industrial			5,446
Commercial
Commercial and industrial			5,446
Non-farm, non-residential real estate			4,573
Construction and development			870
Other commercial			1,498
Commercial total			12,387
Retail
Single family residential			1,217
Retail total			1,217
Total impaired loans			13,604
Commercial
Commercial and industrial		1,404
Non-farm, non-residential real estate		2,417
Construction and development		682
Other commercial		3,124
Commercial total		7,627
Retail
Single family residential		1,015
Retail total		1,015
Total impaired loans		8,642
Commercial
Commercial and industrial	1,572
Non-farm, non-residential real estate	2,706
Construction and development	461
Other commercial	3,488
Commercial total	8,227
Retail
Single family residential	987
Other retail	11
Retail total	998
Total impaired loans	9,225
Related Allowance
Commercial and industrial			601
Commercial
Commercial and industrial			601
Non-farm, non-residential real estate			307
Construction and development			203
Commercial total			1,111
Retail
Single family residential			131
Retail total			131
Total impaired loans			1,242
Commercial
Commercial and industrial		103
Construction and development		118
Other commercial		3,520
Commercial total		221
Retail
Single family residential		82
Retail total		82
Total impaired loans		303
Commercial
Commercial and industrial	16
Non-farm, non-residential real estate	282
Construction and development	44
Commercial total	342
Retail
Single family residential	118
Other retail	11
Retail total	129
Total impaired loans	471
Average Recorded Investment Year To Date
Commercial and industrial			5,069
Commercial
Commercial and industrial			5,069
Non-farm, non-residential real estate			5,232
Construction and development			941
Other commercial			1,527
Commercial total			12,769
Retail
Single family residential			1,269
Retail total			1,269
Total impaired loans			14,038
Commercial
Commercial and industrial		3,483
Non-farm, non-residential real estate		1,606
Construction and development		682
Other commercial		126
Commercial total		9,291
Retail
Single family residential		638
Retail total		39
Total impaired loans		9,291
Commercial
Commercial and industrial	1,620
Non-farm, non-residential real estate	2,819
Construction and development	556
Other commercial	3,704
Commercial total	8,699
Retail
Single family residential	1,044
Other retail	11
Retail total	1,097
Total impaired loans	9,796
Interest Received
Commercial and industrial			193
Commercial
Commercial and industrial			193
Non-farm, non-residential real estate			35
Construction and development			39
Other commercial			190
Commercial total			457
Retail
Single family residential			44
Retail total			44
Total impaired loans			501
Commercial
Commercial and industrial		74
Non-farm, non-residential real estate		83
Construction and development		35
Other commercial		279
Commercial total		318
Retail
Single family residential		39
Retail total		64
Total impaired loans		357
Commercial
Commercial and industrial	23
Non-farm, non-residential real estate	157
Construction and development	30
Other commercial	225
Commercial total	435
Retail
Single family residential	52
Retail total	52
Total impaired loans	487
Interest Accrued
Commercial and industrial			337
Commercial
Commercial and industrial			337
Non-farm, non-residential real estate			70
Construction and development			45
Other commercial			310
Commercial total			762
Retail
Single family residential			68
Retail total			68
Total impaired loans			830
Commercial
Commercial and industrial		259
Non-farm, non-residential real estate		78
Construction and development		40
Commercial total		656
Retail
Single family residential		64
Total impaired loans		720
Commercial
Commercial and industrial	134
Non-farm, non-residential real estate	168
Construction and development	30
Other commercial	241
Commercial total	573
Retail
Single family residential	55
Retail total	55
Total impaired loans	$ 628

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POST RETIREMENT BENEFIT PLAN - Obligations and Funded Status (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Change in benefit obligation
Benefit obligation at beginning of year	$ 7,421	$ 4,572
Service cost	138	91
Interest cost	292	351
Plan participants' contributions	266	(105)
Actuarial (gain) loss	(343)	2,616
Benefits paid	(5,220)	(314)
Amendments	(52)	0
Benefit obligation at end of year	2,313	7,421
Change in plan assets
Fair value of plans assets at beginning of year	0	0
Employer contribution	77	(209)
Plan participants' contributions	266	(105)
Benefits paid	(343)	(314)
Fair value of plan assets at end of year	0	0
Reconciliation of funded status to benefit costs recognized
Projected benefit obligation, end of year	(2,313)	(7,421)
Fair value of assets, end of year	0	0
Funded status, end of year	(2,313)	(7,421)
Unrecognized prior service cost	(52)	0
Unrecognized net loss/(gain)	(2,490)	2,920
Prepaid/(accrued) benefit cost	$ (4,855)	$ (4,501)

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The components of accumulated other comprehensive income (loss) are as follows (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
The components of accumulated other comprehensive income (loss) are as follows
Net unrealized gains (losses) on available-for-sale securities	$ (17,178)	$ 5,747	$ 4,914
Net actuarial gain on unfunded portion of postretirement benefit obligation	2,542	2,920	302
Other comprehensive income (loss) included in shareholder's equity before tax	(14,636)	8,667	5,216
Tax effect (expense) benefit	5,635	(3,337)	(2,008)
Other comprehensive income (loss) included in shareholder's equity net of tax	$ (9,001)	$ 5,330	$ 3,208

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Schedule of allowance for loan losses by segment. (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of allowance for loan losses by segment. (Table):

Schedule of allowance for loan losses by segment. (Table)

The following table shows loans as of December 31, 2013, 2012 and 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Bank’s impairment methodology:

December 31, 2013	Commercial			Residential Real Estate		Consumer & 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
December 31, 2012	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		7,627	$	1,015	$	-	$	8,642
Loans collectively evaluated for impairment	328,298			195,334		34,885		558,517
Ending Balance	$		335,925	$	196,349	$	34,885	$	567,159
December 31, 2011	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		12,387	$	1,217	$	-	$	13,604
Loans collectively evaluated for impairment	268,536			221,365		14,297		504,198
Ending Balance	$	280,923		$	222,582	$	14,297	$	517,802

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POST RETIREMENT BENEFIT PLAN - Current liabilities and noncurrent liabilities (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Defined Benefit Pension Plans and Defined Benefit Postretirement Plans
Current liabilities Postretirement Plans	$ 183	$ 266
Noncurrent liabilities Postretirement Plans	4,672	4,235
Total liabilities Postretirement Plans	$ 4,855	$ 4,501

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Financial assets measured at fair value on a nonrecurring basis (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Level 1
Impaired loans (collateral-dependent)		$ 0
Impaired loans (collateral-dependent)		0
Level 2
Impaired loans (collateral-dependent)		0
Impaired loans (collateral-dependent)		0
Level 3
Impaired loans (collateral-dependent)		4,840
Impaired loans (collateral-dependent)		4,840
Other real estate owned		3,385
Assets measured at fair value on a nonrecurring basis
Impaired loans (collateral-dependent)	2,214
Other real estate owned	208
Total value
Impaired loans (collateral-dependent)		4,840
Impaired loans (collateral-dependent)		4,840
Other real estate owned		3,385
Assets measured at fair value on a nonrecurring basis
Impaired loans (collateral-dependent)	2,214
Other real estate owned	$ 208

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Risk grades and classified loans by class Commercial Loan Portfolio (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Commercial and Industrial
Pass		$ 81,560
Pass		81,560
Special Mention		269
Substandard		726
Doubtful		1,076
TOTALS Commercial Loan Portfolio		83,631
Pass	92,155
Special Mention	836
Substandard	635
Doubtful	1,076
TOTALS Commercial Loan Portfolio	94,702
Non Farm, Non Residential Real Estate Loans
Pass		164,290
Pass		164,290
Special Mention		815
Substandard		2,460
TOTALS Commercial Loan Portfolio		167,565
Pass	170,585
Special Mention	3,883
Substandard	1,745
TOTALS Commercial Loan Portfolio	176,213
Construction and Development
Pass		35,543
Pass		35,543
Special Mention		98
Substandard		682
TOTALS Commercial Loan Portfolio		36,323
Pass	29,463
Substandard	475
TOTALS Commercial Loan Portfolio	29,938
Commercial Loans Secured by Residential R/E
Pass		21,660
Pass		21,660
Special Mention		398
Substandard		1,925
TOTALS Commercial Loan Portfolio		23,983
Pass	26,516
Substandard	424
TOTALS Commercial Loan Portfolio	26,940
All Other Commercial Loans
Pass		22,857
Pass		22,857
Substandard		187
Doubtful		1,379
TOTALS Commercial Loan Portfolio		24,423
Pass	24,131
Special Mention	179
Substandard	1,023
Doubtful	1,249
TOTALS Commercial Loan Portfolio	26,582
Commercial Loan Totals
Pass		325,910
Pass		325,910
Special Mention		1,580
Substandard		5,980
Doubtful		2,455
TOTALS Commercial Loan Portfolio		335,925
Pass	342,850
Special Mention	4,898
Substandard	4,302
Doubtful	2,325
TOTALS Commercial Loan Portfolio	$ 354,375

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Maturities of interest-bearing time deposits (Details) (USD $)	Dec. 31, 2013
Maturities of interest-bearing time deposits
Maturities of interest-bearing time deposits in 2014	$ 185,687
Maturities of interest-bearing time deposits in 2015	25,422
Maturities of interest-bearing time deposits in 2016	14,712
Maturities of interest-bearing time deposits in 2017	7,120
Maturities of interest-bearing time deposits in 2018	5,893
Maturities of interest-bearing time deposits Total	$ 238,834
Number of domestic offices	16

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POST RETIREMENT BENEFIT PLAN - A reconciliation of other comprehensive income (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reconciliation of other comprehensive income
Accumulated other comprehensive income beginning of year	$ 2,920	$ 305	$ (2,849)
Less: loss/(gain) recognized in current year	(190)		205
Plus: loss/(gain) incurred in current year	(136)	2,615
Plus: prior service cost established in current year	(52)
Other comprehensive income/(loss)	(378)	2,615	2,950
Accumulated other comprehensive income ending balance (before tax effects)	$ 2,542	$ 2,920	$ 305

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Employee benefit plans (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Profit sharing plan details
Contribution to the plan amounted which is included in salries and employee benefits expenses	$ 1,596	$ 1,019	$ 874
The Bank contributes to a qualified profit-sharing plan covering employees who meet participation requirements	1,000	1,000	1,000
Value of the single premium universal life insurance policies	975	963
Insurance related liability	49	59
Related liability under this plan	6,487	6,226
Compensation expense as per the agreement	$ 722	$ 853	$ 711

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Actual capital amounts and ratios (Dollars in Thousands)(Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Actual Amount
Total Capital (to Risk Weighted Assets) Consolidated		$ 109,011
Total Capital (to Risk Weighted Assets) Consolidated		109,011
Total Capital (to Risk Weighted Assets) Bank		106,075
Tier I Capital (to Risk Weighted Assets) Consolidated		100,338
Tier I Capital (to Risk Weighted Assets) Bank		97,402
Tier I Capital (to AverageAssets) Consolidated		100,338
Tier I Capital (to AverageAssets)Bank		97,402
Total Capital (to Risk Weighted Assets) Consolidated	110,276
Total Capital (to Risk Weighted Assets) Bank	107,392
Tier I Capital (to Risk Weighted Assets) Consolidated	101,681
Tier I Capital (to Risk Weighted Assets) Bank	98,797
Tier I Capital (to AverageAssets) Consolidated	101,681
Tier I Capital (to AverageAssets)Bank	98,797
Actual Ratio
Total Capital (to Risk Weighted Assets) Consolidated		0.1580
Total Capital (to Risk Weighted Assets) Consolidated		0.1580
Total Capital (to Risk Weighted Assets) Bank		0.1550
Tier I Capital (to Risk Weighted Assets) Consolidated		0.1450
Tier I Capital (to Risk Weighted Assets) Bank		0.1420
Tier I Capital (to AverageAssets) Consolidated		0.0970
Tier I Capital (to AverageAssets)Bank		0.0940
Total Capital (to Risk Weighted Assets) Consolidated	0.1530
Total Capital (to Risk Weighted Assets) Bank	0.1500
Tier I Capital (to Risk Weighted Assets) Consolidated	0.1410
Tier I Capital (to Risk Weighted Assets) Bank	0.1380
Tier I Capital (to AverageAssets) Consolidated	0.0940
Tier I Capital (to AverageAssets)Bank	0.0910
For Minimum Capital Adequacy Purposes Amount Ratio > or =
Total Capital (to Risk Weighted Assets) Consolidated		55,265
Total Capital (to Risk Weighted Assets) Consolidated		55,265
Total Capital (to Risk Weighted Assets) Bank		54,890
Tier I Capital (to Risk Weighted Assets) Consolidated		27,603
Tier I Capital (to Risk Weighted Assets) Bank		27,418
Tier I Capital (to AverageAssets) Consolidated		41,505
Tier I Capital (to AverageAssets)Bank		41,492
Total Capital (to Risk Weighted Assets) Consolidated	57,632
Total Capital (to Risk Weighted Assets) Bank	57,248
Tier I Capital (to Risk Weighted Assets) Consolidated	28,816
Tier I Capital (to Risk Weighted Assets) Bank	28,624
Tier I Capital (to AverageAssets) Consolidated	43,358
Tier I Capital (to AverageAssets)Bank	43,358
For Minimum Capital Adequacy Purposes Ratio > or =
Total Capital (to Risk Weighted Assets) Consolidated		0.0800
Total Capital (to Risk Weighted Assets) Consolidated		0.0800
Total Capital (to Risk Weighted Assets) Bank		0.0800
Tier I Capital (to Risk Weighted Assets) Consolidated		0.0400
Tier I Capital (to Risk Weighted Assets) Bank		0.0400
Tier I Capital (to AverageAssets) Consolidated		0.0400
Tier I Capital (to AverageAssets)Bank		0.0400
Total Capital (to Risk Weighted Assets) Consolidated	0.0800
Total Capital (to Risk Weighted Assets) Bank	0.0800
Tier I Capital (to Risk Weighted Assets) Consolidated	0.0400
Tier I Capital (to Risk Weighted Assets) Bank	0.0400
Tier I Capital (to AverageAssets) Consolidated	0.0400
Tier I Capital (to AverageAssets)Bank	0.0400
For Minimum Regulatory Compliance Purposes Amount
Total Capital (to Risk Weighted Assets) Bank		68,613
Tier I Capital (to Risk Weighted Assets) Bank		41,127
Tier I Capital (to AverageAssets)Bank		51,865
Total Capital (to Risk Weighted Assets) Bank	71,560
Tier I Capital (to Risk Weighted Assets) Bank	42,936
Tier I Capital (to AverageAssets)Bank	54,198
For Minimum Regulatory Compliance Purposes Ration > or =
Total Capital (to Risk Weighted Assets) Bank		0.1000
Tier I Capital (to Risk Weighted Assets) Bank		0.0600
Tier I Capital (to AverageAssets)Bank		0.0500
Total Capital (to Risk Weighted Assets) Bank	0.1000
Tier I Capital (to Risk Weighted Assets) Bank	0.0600
Tier I Capital (to AverageAssets)Bank	$ 0.0500

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EMPLOYEE BENEFIT PLANS

12 Months Ended

Dec. 31, 2013

EMPLOYEE BENEFIT PLANS:

EMPLOYEE BENEFIT PLANS

NOTE 17 – EMPLOYEE BENEFIT PLANS

            The Bank contributes to a qualified profit-sharing plan covering employees who meet participation requirements.  To be eligible to participate, employees must complete 1,000 hours of service within the twelve month time period following their date of hire.  Employees must be age twenty or older.  The amount of the contribution is at the discretion of the Bank’s Board of Directors, up to the maximum deduction allowed for federal income tax purposes.  Contributions to the plan, which amounted to approximately $1,596, $1,019 and $874 in 2013, 2012 and 2011, respectively, are included in salaries and employee benefits expense.

            The Bank formalized a nonqualified salary continuation plan for certain key officers.  In connection with this plan, the value of the single premium universal life insurance policies (approximately $975 at December 31, 2013 and approximately $963 at December 31, 2012) purchased in 1993 to fund the plan and the related liability (approximately $49 at December 31, 2013 and $59 at December 31, 2012) were included in other assets and other liabilities, respectively.  The principal cost of the plan is accrued over the anticipated remaining period of active employment, based on the present value of the expected retirement benefit. 

            The Corporation and Bank implemented a deferred compensation plan that permits directors to defer their director’s fees and earn interest on the deferred amount in the amount of the wall street journal prime rate plus three percent.  The agreements provide for a lump sum payment or 120 month payments of deferred fees plus accrued interest after retirement, separation from service, or death.  The liability accrued for this plan totaled $6,487 and $6,226 at December 30, 2013 and 2012, respectively.  The charge to expense for the agreements was $722, $853 and $711 for the years ended December 31 2013, 2012 and 2011, respectively.    

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Amortized cost and fair value of securities by contractual maturity (Details) (USD $)	Dec. 31, 2013
Amortized Cost
Securities available for Sale Within one year	$ 5,841
Available for Sale
Securities available for Sale Within one year	5,841
Securities available for Sale One to five years	26,404
Securities available for Sale Five to ten years	131,468
Securities available for Sale After ten years	15,134
Securities available for Sale Mortgage-backed securities	168,045
Securities available for Sale Total	346,892
Held to Maturity
Securities held to Maturity Within one year	3,135
Securities held to Maturity One to five years	7,043
Securities held to Maturity Five to ten years	16,554
Securities held to Maturity After ten years	1,107
Securities held to Maturity Mortgage-backed securities	0
Securities held to Maturity total	27,839
Estimated Fair Value
Securities available for Sale Within one year	5,920
Available for Sale
Securities available for Sale Within one year	5,920
Securities available for Sale One to five years	26,489
Securities available for Sale Five to ten years	124,308
Securities available for Sale After ten years	15,574
Securities available for Sale Mortgage-backed securities	157,423
Securities available for Sale Total	329,714
Held to Maturity
Securities held to Maturity Within one year	3,208
Securities held to Maturity One to five years	7,305
Securities held to Maturity Five to ten years	16,953
Securities held to Maturity After ten years	1,129
Securities held to Maturity Mortgage-backed securities	0
Securities held to Maturity total	$ 28,595

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Schedule of Deposits (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Deposits (Tables):

Schedule of Deposits (Tables)

The Bank does not have any foreign offices and all deposits are serviced in its 16 domestic offices.  Maturities of time deposits of $100 or more at December 31, 2013 and 2012 are as follows:

	2013	2012
Under 3 months	$     31,514	$       28,504
3 to 12 months	$     63,429	64,639
Over 12 months	$     27,834	27,018
Total	$   122,777	$     120,161

The following table presents maturities of interest-bearing time deposits as of December 31, 2013:

2014	$      185,687
2015	$        25,422
2016	$        14,712
2017	$          7,120
2018	$          5,893
Thereafter	$                -
Total	$      238,834

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Unaudited quarterly interim financial information for the Corporation (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
First Quarter
Interest income		$ 9,065
Interest income		9,065
Interest expense		1,071
Net interest income		7,994
Provision for possible loan losses, net		600
Noninterest income		3,379
Noninterest expenses		7,754
Income before income taxes		3,019
Income taxes		690
Net income		2,329
Basic earnings per share		$ 0.44
Weighted average shares outstanding per quarter		5,330,000
Interest income	9,223
Interest expense	834
Net interest income	8,389
Provision for possible loan losses, net	0
Noninterest income	3,329
Noninterest expenses	8,105
Income before income taxes	3,613
Income taxes	557
Net income	3,056
Basic earnings per share	$ 0.59
Weighted average shares outstanding per quarter	5,178,759
Second Quarter
Interest income		9,095
Interest income		9,095
Interest expense		979
Net interest income		8,116
Provision for possible loan losses, net		520
Noninterest income		3,360
Noninterest expenses		8,424
Income before income taxes		2,532
Income taxes		451
Net income		2,081
Basic earnings per share		$ 0.39
Weighted average shares outstanding per quarter		5,330,000
Interest income	9,523
Interest expense	751
Net interest income	8,772
Noninterest income	2,620
Noninterest expenses	8,165
Income before income taxes	3,227
Income taxes	842
Net income	2,385
Basic earnings per share	$ 0.46
Weighted average shares outstanding per quarter	5,133,051
Third Quarter
Interest income		9,114
Interest income		9,114
Interest expense		917
Net interest income		8,197
Noninterest income		2,276
Noninterest expenses		8,145
Income before income taxes		2,328
Income taxes		373
Net income		1,955
Basic earnings per share		$ 0.37
Weighted average shares outstanding per quarter		5,328,002
Interest income	9,328
Interest expense	679
Net interest income	8,649
Noninterest income	2,509
Noninterest expenses	8,322
Income before income taxes	2,836
Income taxes	779
Net income	2,057
Basic earnings per share	$ 0.40
Weighted average shares outstanding per quarter	5,086,469
Fourth Quarter
Interest income		9,110
Interest income		9,110
Interest expense		874
Net interest income		8,236
Noninterest income		2,616
Noninterest expenses		9,207
Income before income taxes		1,645
Income taxes		402
Net income		1,243
Basic earnings per share		$ 0.23
Weighted average shares outstanding per quarter		5,332,893
Interest income	9,287
Interest expense	643
Net interest income	8,644
Noninterest income	2,658
Noninterest expenses	8,237
Income before income taxes	3,065
Income taxes	687
Net income	2,378
Basic earnings per share	$ 0.47
Weighted average shares outstanding per quarter	5,046,833
Total.
Interest income		36,384
Interest income		36,384
Interest expense		3,841
Net interest income		32,543
Provision for possible loan losses, net		1,120
Noninterest income		11,631
Noninterest expenses		33,530
Income before income taxes		9,524
Income taxes		1,916
Net income		7,608
Basic earnings per share		$ 1.43
Weighted average shares outstanding per quarter		5,315,634
Interest income	37,361
Interest expense	2,907
Net interest income	34,454
Noninterest income	11,116
Noninterest expenses	32,829
Income before income taxes	12,741
Income taxes	2,865
Net income	$ 9,876
Basic earnings per share	$ 1.93
Weighted average shares outstanding per quarter	5,110,849

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Schedule of Federal and State Income Taxes (Table)

12 Months Ended

Dec. 31, 2013

Schedule of Federal and State Income Taxes (Table):

Schedule of Components of Income Tax Expense (Benefit)

The following table presents components of income tax expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011:

	2013		2012		2011
Current	$	915	$	2,256	$	1,960
Deferred	1,950		(340)		(1,216)
Total provision for income taxes	2,865		1,916		744
Deferred Tax Effects of Principal Temporary Differences	2013		2012		2011
Allowance for possible loan losses	$	3,309	$	3,392	$	3,519
Deferred compensation	2,516		2,420		2,234
Write down of other real estate	314		1,152		1,621
Deferred gain on OREO sale	188		202		-
Amortization of core deposit intangible	(272)		423		575
Recognition of nonaccrual loan income	111		152		66
Unrealized gains (losses) on available-for-sale securities	6,613		(2,212)		(1,892)
Post retirement benefit obligation	1,849		1,733		1,643
Accelerated depreciation	(822)		(630)		(562)
Amortization of goodwill	(2,591)		(2,376)		(2,152)
Alternative Minimum Tax	-		402		422
Dividend Income - F&M West	(372)		(219)		(241)
Prepaid Expenses	(178)		(185)		-
Other	(304)		(368)		(360)
Net deferred tax asset	$	10,905	$	3,884	$	4,872

Schedule of Effective Income Tax Rate Reconciliation

Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)	2013		2012		2011
Tax expense at statutory rate	$	4,332	$	3,238	$	2,632
Increase (decrease) in taxes resulting from:
Tax exempt interest	(1,144)		(1,275)		(1,533)
Nondeductible interest expense	18		29		45
Employee benefits	(196)		(240)		(244)
Other nondeductible expenses
(nontaxable income) - net	11		32		55
State income taxes net of federal tax benefit	-		41		(40)
Dividend income exclusion	-		(1)		(52)
Other	(156)		92		(119)
Total provision for income taxes	$	2,865	$	1,916	$	745
Effective tax rate	22.4%		20.1%		9.6%

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Bank's loans by category (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Bank's loans by category
Commercial and industrial loans	$ 94,702	$ 83,631
Non-farm, nonresidential real estate loans	176,213	167,565
Construction and development loans	29,938	36,323
Commercial loans secured by real estate loans	26,940	23,983
Other commercial loans	26,582	24,423
Total commercial loans	354,375	335,925
Consumer loans	10,957	11,621
Single family residential loans	213,763	196,349
Other retail loans	27,671	23,264
Total residential and consumer loans	252,391	231,234
Total Bank's loans	606,766	567,159
Less: Allowance for possible loan losses	(8,595)	(8,809)
Total net loans	$ 598,171	$ 558,350

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Deferred Tax Effects of Principal Temporary Differences (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Deferred Tax Effects of Principal Temporary Differences
Allowance for possible loan losses	$ 3,309	$ 3,392	$ 3,519
Deferred compensation	2,516	2,420	2,234
Write down of other real estate	314	1,152	1,621
Deferred gain on OREO sale	188	202
Amortization of core deposit intangible	(272)	423	575
Recognition of nonaccrual loan income	111	152	66
Unrealized gain (loss) on available for sale securities	6,613	(2,212)	(1,892)
Post retirement benefit obligation	1,849	1,733	1,643
Accelerated depreciation	(822)	(630)	(562)
Amortization of goodwill	(2,591)	(2,376)	(2,152)
Alternative Minimum Tax		402	422
Dividend Income - F&M West	(372)	(219)	(241)
Prepaid Expense	(178)	(185)
Other	(304)	(368)	(360)
Net deferred tax assets	$ 10,905	$ 3,884	$ 4,872

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Allowance for loan losses allocated to each portfolio segment disaggregated on the basis of the bank's impairment methodology (Details) (USD $)	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2010	$ 0
Loans individually evaluated for impairment	12,387	1,217		13,604
Loans collectively evaluated for impairment	268,536	221,365	14,297	504,198
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2011	280,923	222,582	14,297	517,802
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2011
Loans individually evaluated for impairment	7,627	1,015		8,642
Loans collectively evaluated for impairment	328,298	195,334	34,885	558,517
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2012	335,925	196,349	34,885	567,159
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2012
Loans individually evaluated for impairment	8,227	987	11	9,225
Loans collectively evaluated for impairment	346,148	212,776	38,617	597,541
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2013	$ 354,375	$ 213,763	$ 38,628	$ 606,766

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Amounts reclassified from AOCI by component (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Amounts reclassified from AOCI by component
Unrealized gains (losses) on available-for-sale securities	$ 829	$ 2,294	$ 1,458
Tax (expense) benefit on Unrealized gains (losses) on available-for-sale securities	(319)	(883)	(561)
Net reclassified amount on Unrealized gains (losses) on available-for-sale securities	510	1,411	897
Amortization of defined benefit pension items Actuarial gains (losses)	(190)		205
Tax (expense) benefit on Actuarial gains (losses)	73		(79)
Net reclassified amount on Actuarial gains (losses)	(117)		126
Total reclassifications out of AOCI	$ 393	$ 1,411	$ 1,023

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GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2013

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States (“GAAP”) and to general practices in the banking industry.  The significant accounting policies applicable to First Farmers and Merchants Corporation (the Corporation) are summarized as follows.

Nature of Operations

The Corporation is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Farmers and Merchants Bank (the Bank).  The Bank is primarily engaged in providing a full range of banking and financial services, including lending, investing of funds, obtaining deposits, trust and wealth management operations, and other financing activities to individual and corporate customers in the middle Tennessee area.  The Bank is subject to competition from other financial institutions.  The Corporation and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank.  The Bank has the following direct and indirect subsidiaries: F & M West, Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc.  Noncontrolling interests consist of preferred shares in Maury Tenn Properties, Inc. that are owned by third parties and Maury Tenn, Inc.  The preferred shares in Maury Tenn Properties, Inc. receive dividends, which are included in the consolidated statements of income.  Intercompany accounts and transactions have been eliminated in consolidation.

Certain items in prior financial statements have been reclassified to conform to the current presentation.  These reclassifications had no effect on net income.

 Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management of the Corporation and the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities.  Those estimates and assumptions also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses, the fair value of financial instruments,  the valuation of foreclosed real estate, valuation of goodwill, valuation of deferred tax assets and the liability related to post-retirement benefits.

Concentrations of Credit Risk

The Corporations’ banking activities include granting commercial, residential, and consumer loans to customers primarily located in central and south central Tennessee and Northern Alabama.  The Corporation is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions.  Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus allowance for loan losses and total capital are not exceeded.  At December 31, 2013 our concentrations of commercial real estate, rental and leasing loans were 119.6% of Tier 1 Capital plus the allowance for loan and lease losses, respectively.  Health care and social assistance loans were 46.3%.  Manufacturing and construction loans were 25.4%.  Wholesale trade credits were 25.2%.  These percentages are within our internally established limits regarding concentrations of credit.

 Loans secured by non-farm, non-residential real estate comprised 29.0% of the loan portfolio at December 31, 2013.  Management remains comfortable with the real estate exposure levels within the commercial loan portfolio.  Management believes the commercial real estate portion remains well diversified across several different property types and several different geographic markets, stretching primarily from Davidson County, Tennessee to northern Alabama.

Cash and Due From Banks

Included in cash and due from banks are reserve amounts that are required to be maintained in the form of cash and balances due from the Federal Reserve Bank and other banks.  At December 31, 2013, the Bank’s required reserve was $2,560 at the Federal Reserve.  From time to time throughout the year, the Bank’s balances due from other financial institutions exceeded Federal Deposit Insurance Corporation (FDIC) insurance limits.  The Bank had one account over the limit at December 31, 2013 and it was $261.  Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. 

Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents include cash on hand, cash due from banks and federal funds sold.  Federal funds are sold for one-day periods. 

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Corporation does not intend to sell a debt security, and it is more likely than not the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.  For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections. 

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased commercial loans are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments. 

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is established through provisions for loan and lease losses charged against income.  Loan losses are charged against the allowance when management determines that the uncollectibility of a loan has been confirmed.  Subsequent recoveries, if any, are credited to the allowance account in the period received.

The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporation’s Board of Directors.  The Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation.  This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.

A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to the Corporation, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due. 

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 (4 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.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.  Gains and losses on loan sales are recorded in noninterest income.  The Corporation does not retain servicing rights on loans sold.  Loans held for sale at December 31, 2013 and 2012 totaled $327 and $2,456, respectively.

Other Real Estate

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

When foreclosed properties are acquired current appraisals are obtained on the properties.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected selling costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 24 months. 

Premises and Equipment

            Premises and equipment are stated at cost, less accumulated depreciation and amortization.  The provision for depreciation is computed principally on an accelerated method over the estimated useful life of an asset, which ranges from 15 to 39 years for buildings and from three to 25 years for equipment.  Costs of major additions and improvements are capitalized.  Expenditures for maintenance and repairs are charged to operations as incurred.  Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems.  The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.  At December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock totaled $3,879.

Goodwill

Goodwill is evaluated annually for impairment.  Quantitative and qualitative assessments are performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill.  If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

The Corporation files consolidated income tax returns with its subsidiaries.  The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Corporation determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.  Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.  With a few exceptions, the Corporation is no longer subject to U.S. federal tax examinations for years before 2010, and state and local tax examinations by tax authorities for years before 2010.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.

Securities Sold Under Agreements to Repurchase

            Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date.  Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction

Fair Value Measurements

            FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements.  See Note 13 – Fair Value Measurement.  In general, fair values of financial instruments are based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as input, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

Shareholders’ Equity and Earnings Per Share

Basic earnings per share represent income available to shareholders divided by the weighted average number of shares of Corporation common stock outstanding during the period.  Diluted earnings per share reflect additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued, as well

as any adjustment to income that would result from the assumed conversion.  For the years ended December 31, 2013, 2012 and 2011, there were no potentially dilutive shares of common stock issuable.

In 2013, the Corporation adopted a plan to repurchase shares of its common stock.  The plan allowed the purchase of up to 200,000 shares.  The Corporation purchased 158,988 shares in 2013.  In 2012, the Corporation adopted a plan to repurchase up to 150,000 shares of common stock .  The Corporation repurchased 150,000 shares in 2012.  For 2011, the Corporation adopted a similar plan allowing it to repurchase up to 100,000 shares of common stock.  The Corporation repurchased 100,000 shares in 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income tax expenses or benefits.  Other comprehensive (loss) income includes unrealized appreciation or depreciation on available-for-sale securities and changes in the net actuarial gain or loss of the postretirement benefit obligation.

The components of accumulated other comprehensive income (loss), included in shareholder’s equity, are as follows as of December 31, 2013, 2012 and 2011:

	Years Ended December 31,
	2013		2012		2011
Net unrealized gains (losses)
on available-for-sale securities	$	(17,178)	$	5,747	$	4,914
Net actuarial gain on unfunded portion
of postretirement benefit obligation	2,542		2,920		302
	(14,636)		8,667		5,216
Tax effect - (expense) benefit	5,635		(3,337)		(2,008)
Other comprehensive income (loss)	$	(9,001)	$	5,330	$	3,208

Transfers Between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.

Segment Reporting

Management analyzes the operations of the Corporation assuming one operating segment, community lending services.

Recent Accounting Pronouncements

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Corporation on January 1, 2013 and did not have a significant impact on the Corporation’s financial statements. See Note 2 – Other Comprehensive Income (Loss).

ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists (Topic 740-10) – a consensus of the FASB Emerging Issues Task Force.”  ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists.  The objective is to eliminate diversity in practice resulting from a lack of guidance on this topic.  ASU 2013-11 will be effective for the Corporation after December 15, 2013 and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2013-12, “Definition of a Public Business Entity – An Addition to the Master Glossary” amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP.  The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to business entities.  The amendment does not affect existing requirements, but instead improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance.  There is no actual effective date for the amendment in this Update.  However, the term public business entity will be used beginning with ASU 2014-01.  ASU 2013-12 is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” clarifies when an in substance repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The new update requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The update 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.

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Corporation's assets by category (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Corporation's assets by category
Land	$ 8,223	$ 9,003
Premises	22,765	22,717
Furniture and equipment	9,367	9,401
Leasehold improvements	1,095	1,319
Corporation's assets gross	41,450	42,440
Less allowance for depreciation and amortization	(16,582)	(16,023)
Corporation's assets net	$ 24,868	$ 26,417

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Schedule of Condensed Financial Information of the Corporation (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Condensed Financial Information of the Corporation (Tables):

Condensed Balance Sheet

The following tables present the condensed balance sheets, statements of income, comprehensive income, and cash flows of the Corporation as of December 31, 2013 and 2012: 

CONDENSED BALANCE SHEETS

	As of December 31,
	2013		2012
Cash	$	23	$	61
Investment in bank subsidiary	99,695		111,655
Investment in credit life insurance company	54		54
Investment in other securities	17		17
Dividends receivable from bank subsidiary	2,058		1,917
Cash surrender value - life insurance	4,409		4,395
Total assets	$	106,256	$	118,099
Liabilities
Accrued liabilities	$	1,820	$	1,686
Dividends payable	1,858		1,917
Total liabilities	3,678		3,603
Shareholders' equity
Common stock - $10 par value, 8,000,000 shares authorized;
5,021,012 and 5,180,000 shares issued and outstanding,
as of December 31, 2013 and December 31, 2012, respectively	50,210		51,800
Retained earnings	61,369		57,366
Accumulated other comprehensive income (loss)	(9,001)		5,330
Total shareholders' equity	102,578		114,496
Total liabilities and shareholders' equity	$	106,256	$	118,099

Condensed Income Statement

CONDENSED STATEMENTS OF INCOME

	Years ended December 31,
	2013		2012		2011
Operating income
Dividends from bank subsidiary	$	7,663	$	7,289	$	6,974
Other dividend income	15		18		15
Other	65		135		130
Operating expenses	(238)		(218)		(199)
Income before equity in undistributed net
income of bank subsidiary	7,505		7,224		6,920
Equity in undistributed net income of bank subsidiary	2,371		384		76
Net Income	$	9,876	$	7,608	$	6,996

Comprehensive Income (Loss)

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
	2013		2012		2011
Net Income for common shareholders	$	9,876	$	7,608	$	6,996
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of ($8,507), $1,204, and $2,960	(13,589)		1,923		4,728
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively	(510)		(1,411)		(897)
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively	(232)		1,610		1,940
Other Comprehensive Income (Loss)	(14,331)		2,122		5,771
Total Comprehensive Income (Loss)	$	(4,455)	$	9,730	$	12,767

Condensed Cash Flow Statement

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2013		2012		2011
Operating activities
Net income for the year	$	9,876	$	7,608	$	6,996
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary	(2,371)		(384)		(76)
Increase in cash surrender value of life insurance contracts	(65)		(135)		(130)
(Increase) decrease in other assets	(90)		56		(1,972)
Decrease in payables	84		127		126
Total adjustments	(2,442)		(336)		(2,052)
Net cash provided by operating activities	7,434		7,272		4,944
Investing activities
Purchase of single premium life insurance policy	-		(310)		-
Net cash used by investing activities	-		(310)		-
Financing activities
Payment to repurchase common stock	(3,722)		(3,400)		(3,011)
Cash dividends paid	(3,800)		(3,944)		(1,991)
Advance from subsidiary	50		-		-
Net cash used by financing activities	(7,472)		(7,344)		(5,002)
Decrease in cash	(38)		(382)		(58)
Cash at beginning of year	61		443		501
Cash at end of year	$	23	$	61	$	443

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Schedule of Bank Investments, Deby and Equity Securities (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Bank Investments, Deby and Equity Securities (Tables):

Marketable Securities

  The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are summarized as follows:

	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
	Amortized		Gross Unrealized				Fair
December 31, 2012	Cost		Gains		Losses		Value
Available-for-sale securities
U.S. Government agencies	$	143,897	$	400	$	280	$	144,017
U.S. Government sponsored agency mortgage backed securities	131,917		1,856		55		133,718
States and political subdivisions	47,273		3,306		-		50,579
Corporate bonds	16,884		529		9		17,404
	$	339,971	$	6,091	$	344	$	345,718
Held-to-maturity securities
States and political subdivisions	$	31,755	$	1,665	$	-	$	33,420

Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value

 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 December 31, 2013 and 2012:

	Less than 12 months		12 months or Greater		Total
December 31, 2013	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$   100,533	$        7,330	$       4,539	$           461	$ 105,072	$        7,791
US 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
	Less than 12 months		12 months or Greater		Total
December 31, 2012	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$     68,979	$           280	$              -	$                -	$   68,979	$           280
US Government sponsored agency mortgage
backed securities	12,881	55	-	-	12,881	55
Corporate bonds	1,719	9	-	-	1,719	9
	$     83,579	$           344	$              -	$                -	$   83,579	$           344

Investments Classified by Contractual Maturity Date

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, 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
December 31, 2013	Amortized	Estimated	Amortized	Estimated
	Cost	Fair Value	Cost	Fair Value
Within one year	$      5,841	$        5,920	$     3,135	$         3,208
One to five years	26,404	26,489	7,043	7,305
Five to ten years	131,468	124,308	16,554	16,953
After ten years	15,134	15,574	1,107	1,129
Mortgage-backed securities	168,045	157,423	-	-
Total	$  346,892	$    329,714	$   27,839	$       28,595

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ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT (TABLES)

12 Months Ended

Dec. 31, 2013

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT (TABLES):

Schedule of Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in shareholder’s equity, are as follows as of December 31, 2013, 2012 and 2011:

	Years Ended December 31,
	2013		2012		2011
Net unrealized gains (losses)
on available-for-sale securities	$	(17,178)	$	5,747	$	4,914
Net actuarial gain on unfunded portion
of postretirement benefit obligation	2,542		2,920		302
	(14,636)		8,667		5,216
Tax effect - (expense) benefit	5,635		(3,337)		(2,008)
Other comprehensive income (loss)	$	(9,001)	$	5,330	$	3,208

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT (TABLES)

Amounts reclassified from AOCI and the affected line items in the statements of income during the periods ended December 31, 2013, 2012 and 2011, were as follows:

											Affected Line Item in the Statements of Income
	Amounts Reclassified from AOCI
	Years Ended
	December 31, 2013				December 31, 2012			December 31, 2011
Unrealized gains (losses) on available-for-sale securities	$	829			$	2,294		$	1,458		Realized gain (loss) on sale of securities
	(319)				(883)			(561)			Tax (expense) benefit
	$		510		$	1,411		$	897		Net reclassified amount
Amortization of defined benefit pension items
Actuarial gains (losses)	$		(190)		$	-		$	205
	73				-			(79)			Tax (expense) benefit
	$		(117)		$		-	$		126	Net reclassified amount
Total reclassifications out of AOCI	$			393	$		1,411	$	1,023

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Loans modified and included as a troubled debt restructuring (dollars in thousands) (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Number of Loans
Commercial and industrial trouble debt restructurings		$ 1
Commercial:
Commercial and industrial trouble debt restructurings		1
Nonfarm nonresidential trouble debt restructurings		1
Retail:
Consumer trouble debt restructurings		1
Single family residential trouble debt restructurings		3
Total trouble debt restructurings		6
Commercial:
Commercial and industrial trouble debt restructurings	0
Nonfarm nonresidential trouble debt restructurings	0
Retail:
Consumer trouble debt restructurings	3
Single family residential trouble debt restructurings	3
Total trouble debt restructurings	6
Post - Modification Outstanding Balance
Commercial and industrial trouble debt restructurings		8
Commercial:
Commercial and industrial trouble debt restructurings		8
Nonfarm nonresidential trouble debt restructurings		361
Retail:
Consumer trouble debt restructurings		3
Single family residential trouble debt restructurings		237
Total trouble debt restructurings		609
Retail:
Consumer trouble debt restructurings	8
Single family residential trouble debt restructurings	167
Total trouble debt restructurings	175
Net Charge-offs Resulting from Modifications
Retail:
Single family residential trouble debt restructurings	6
Total trouble debt restructurings	$ 6

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Schedule of Post Retirement Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Post Retirement Benefit Plans (Tables):

Schedule of Defined Benefit Plan Amounts Recognized in Other Comprehensive Income (Loss)

     The following table provides further information about the plan:

	Post-Retirement Benefits
	2013		2012
Change in benefit obligation
Benefit obligation at beginning of year	$	7,421	$	4,572
Service cost	138		91
Interest cost	292		351
Plan participants’ contribution	77		(81)
Expected benefits paid	(343)		(128)
Actuarial (gain) loss	(5,220)		2,616
Amendments	(52)		-
Benefit obligation at end of year	$	2,313	$	7,421
Change in fair value of assets
Fair value of plans assets at beginning of year	$	-	$	-
Employer contribution	77		(209)
Plan participants' contributions	266		(105)
Benefits paid	(343)		(314)
Fair value of plan assets at end of year	$	-	$	-
Reconciliation of funded status to benefit costs recognized
Projected benefit obligation, end of year	$	(2,313)	$	(7,421)
Fair value of assets, end of year	-		-
Funded status, end of year	(2,313)		(7,421)
Unrecognized prior service cost	(52)		-
Unrecognized net loss/(gain)	(2,490)		2,920
Prepaid/(accrued) benefit cost	(4,855)		(4,501)

Schedule of Defined Benefit Plans Disclosures

 Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:

	2013		2012
Unrecognized net actuarial gain/loss	$	2,490	$	2,920
Unrecognized prior service cost	52		-
	$	2,542	$	2,920

Amounts recognized in statement of financial position are as follows:

	2013		2012
Current Liability	$	183	$	266
Noncurrent liability	4,672		4,235
Total	$	4,855	$	4,501

Schedule of Amounts in Accumulated Other Comprehensive Income (Loss) to be Recognized over Next Fiscal Year

     A reconciliation of other comprehensive income is as follows:

	Post-Retirement Benefits
	2013		2012		2011
Accumulated other comprehensive income beginning of year	$	2,920	$	305	$	(2,849)
Less: loss/(gain) recognized in current year	(190)		-		205
Plus: loss/(gain) incurred in current year	(136)		2,615		-
Plus: prior service cost established in current year	(52)		-		-
Other comprehensive income/(loss)	(378)		2,615		2,950
Ending balance (before tax effects)	$	2,542	$	2,920	$	305
	Post-Retirement Benefits
Components of net periodic benefit cost:	2013		2012		2011
Service cost	$	138	$	91	$	24
Interest cost	292		351		139
Recognized net actuarial (gain) loss	190		-		(205)
Net periodic benefit cost (income)	$	620	$	442	$	(42)

Schedule of Assumptions Used

The estimated net gain for the defined benefits postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $188.

	Post-Retirement Benefits
Weighted-average assumption used to determine benefit obligation:	2013	2012
Discount rate	5%	4%
Rate of compensation increase	NA	NA

	Post-Retirement Benefits
Weighted-average assumptions used to determine benefit costs:	2013	2012
Discount rate	4%	8%

Schedule of Health Care Cost Trend Rates

Health care trend rate	2013	2012
Initial
Pre-65	11%	11%
Post-65	7.50%	8%
Ultimate (pre and post-65	5.00%	5%
Years to ultimate
Pre-65	6	6
Post-65	5	6

Schedule of Expected Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, net of participant contributions:

FYE	Company Benefits
2014	$         183
2015	167
2016	178
2017	169
2018	191
2019-2025	935
	$      1,823

Schedule of Effect of One-Percentage-Point Change in Assumed Health Care Cost Trend Rates

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage-Point Increase	1-Percentage-Point Decrease
Effect on total of service and interest cost	$     29	$  (16)
Effect on postretirement benefit obligation	212	(109)

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Schedule of Bank Loan Portfolio (Table)

12 Months Ended

Dec. 31, 2013

Schedule of Bank Loan Portfolio (Table):

Schedule of Accounts, Notes, Loans and Financing Receivable

The following table presents the Bank’s loans by category as of December 31, 2013 and 2012:

	December 31, 2013		December 31, 2012
Commercial
Commercial and industrial	$	94,702	$	83,631
Non-farm, nonresidential real estate	176,213		167,565
Construction and development	29,938		36,323
Commercial loans secured by real estate	26,940		23,983
Other commercial	26,582		24,423
Total commercial	354,375		335,925
Residential
Consumer loans	10,957		11,621
Single family residential	213,763		196,349
Other retail	27,671		23,264
Total residential and consumer	252,391		231,234
	$	606,766	$	567,159
Less:
Allowance for possible loan losses	(8,595)		(8,809)
Total net loans	$	598,171	$	558,350

Past Due Financing Receivables

The following table provides details regarding the aging of the Bank’s loan portfolio:

December 31, 2013	30 - 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans
Retail
Consumer	$	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 estate	38		178		216		26,724		26,940
All 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
December 31, 2012	30 - 89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Past Due		Current		Total Loans
Retail
Consumer	$	112	$	7	$	119	$	11,502	$	11,621
Single family residential	3,543		387		3,930		192,419		196,349
Other retail	193		-		193		23,071		23,264
Retail total	$	3,848	$	394	$	4,242	$	226,992	$	231,234
Commercial
Commercial and industrial	$	618	$	1,457	$	2,075	$	81,556	$	83,631
Non-farm, non-residential real estate	666		448		1,114		166,451		167,565
Construction and development	160		-		160		36,163		36,323
Commercial loans secured by real estate	22		193		215		23,768		23,983
All other commercial	741		1,379		2,120		22,303		24,423
Commercial total	$	2,207	$	3,477	$	5,684	$	330,241	$	335,925
Total	$	6,055	$	3,871	$	9,926	$	557,233	$	567,159

Financing Receivable Credit Quality Indicators

The following table presents risk grades and classified loans by class for year ending December 31, 2013 and 2012:

December 31, 2013
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial and Industrial		Non-Farm, Non-Residential Real Estate Loans		Construction and Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial 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 delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		10,9366	$	212,096	$	27,643	$	250,675
Nonperforming*	21			1,667		28		1,716
TOTALS	$	10,957		$	213,763	$	27,671	$	252,391

December 31, 2012
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial and Industrial			Non-Farm, Non-Residential Real Estate Loans		Construction and  Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial Loan Totals
Pass	$		81,560	$	164,290	$	35,543	$	21,660	$	22,857	$	325,910
Special Mention	269			815		98		398		-		1,580
Substandard	726			2,460		682		1,925		187		5,980
Doubtful	1,076			-		-		-		1,379		2,455
TOTALS	$		83,631	$	167,565	$	36,323	$	23,983	$	24,423	$	335,925
Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		11,610	$	192,808	$	23,131	$	227,549
Nonperforming*	11			3,541		133		3,685
TOTALS	$	11,621		$	196,349	$	23,264	$	231,234

*Loans are classified as nonperforming loans and are automatically placed on nonaccrual status once they reach 90 days past due.  For purposes of this table all loans graded substandard or below are including in nonperforming.

**Single-family residential loans includes primary liens, closed-end secondary liens, residential construction loans, and home equity lines of credit.

Impaired Financing Receivables

The following table summarizes the impaired loans by loan type as of December 31, 2013 and 2012:

December 31, 2013	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$		2,190	$		1,338	$	234	$	1,572		$	16		$	1,620		$	23		$	134
Non-farm, non-residential real estate	3,236			1,155			1,551		2,706			282			2,819			157			168
Construction and development	461			461			-		461			44			556			30			30
Other commercial	3,834			3,310			178		3,488			-			3,704			225			241
Commercial total	9,721			6,264			1,963		8,227			342			8,699			435			573
Retail
Single family residential	1,121			568			419		987			118			1044			52			55
Other retail	11			-			11		11			11			11
Retail total	1,132			568			430		998			129			1,097			52			55
Total	$		10,853	$		6,382	$	2,393	$	9,225		$	471		$	9,796		$	487		$	628
December 31, 2012	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$		2,036	$		1,076	$	328	$	1,404		$	103		$	3,483		$	74		$	259
Non-farm, non-residential real estate	3,613			2,417			-		2,417			-			1,606			83			78
Construction and development	682			-			682		682			118			682			35			40
Other commercial	3,124			3,124			-		3,124						3,520			126			279
Commercial total	9,455			6,617			1,010		7,627			221			9,291			318			656
Retail
Single family residential	1,237			402			613		1,015			82			638			39			64
Retail total	1,237			402			613		1,015			82						39			64
Total	$	10,692		$	7,019		$	1,623	$	8,642		$	303		$	9,291		$	357		$	720
December 31, 2011	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$	5,839		$	738		$	5,678	$	5,446		$	601		$	5,069		$	193		$	337
Non-farm, non-residential real estate	4,378			2,986			2,115		4,573			307			5,232			35			70
Construction and development	870			-			870		870			203			941			39			45
Other commercial	3,238			-			-		1,498			-			1,527			190			310
Commercial total	14,325			3,724			8,663		12,387			1,111			12,769			457			762
Retail
Single family residential	1,388			142			1,075		1,217			131			1,269			44			68
Retail total	1,388			142			1,075		1,217			131			1,269			44			68
Total	$	15,713		$	3,866		$	9,738	$		13,604	$		1,242	$		14,038	$		501	$	830

* Interest income received is recognized interest income and approximates cash basis.

Schedule of Financing Receivables, Non Accrual Status

 Non-accrual loans, segregated by class of loans, were as follows at December 31, 2013 and 2012:

	2013		2012
Commercial and industrial	$	1,649	$	1,595
Nonfarm, nonresidential real estate	737		1,372
Construction and development	68		50
Commercial real estate	6		126
Other commercial	1,248		1,379
Consumer	21		11
Single family residential	1,667		3,541
Total	$	5,396	$	8,074

Schedule of Debtor Troubled Debt Restructuring, Current Period

During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012:

		2013					2012
		Post - Modification		Net Charge-offs			Post -Modification		Net Charge-offs
	Number of	Outstanding		Resulting from		Number of	Outstanding		Resulting from
(dollars in thousands)	Loans	Balance		Modifications		Loans	Balance		Modifications
Commercial:
Commercial and industrial	-	$	-	$	-	1	$	8	$	-
Nonfarm nonresidential	-	-		-		1	361		-
Retail:
Consumer	3	8		-		1	3		-
Single family residential	3	167		6		3	237		-
Total trouble debt restructurings	6	$	175	$	6	6	$	609	$	-

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Schedule of Allowance for Loan and Lease Losses (Table)

12 Months Ended

Dec. 31, 2013

Schedule of Allowance for Loan and Lease Losses (Table):

Schedule of Credit Losses for Financing Receivables, Current

The following table summarizes the allocation in the allowance for loan losses by loan segment for the years ended December 31, 2013, 2012 and 2011: 

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,528	$             1,109	$                   172	$             8,809
Less: Charge-offs	222	27	49	298
Add: Recoveries	53	2	29	84
Add: Provisions	-	-	-	-
Ending Balance	$              7,359	$             1,084	$                   152	$             8,595

December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              6,895	$             2,113	$                   192	$          9,200
Less: Charge-offs	1,690	176	19	1,885
Add: Recoveries	364	2	8	374
Add: Provisions	1,959	(830)	(9)	1,120
Ending Balance	$            7,528	$           1,109	$                  172	$          8,809

December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,011	$             2,001	$                   408	$            9,420
Less: Charge-offs	3,353	52	147	3,552
Add: Recoveries	103	-	104	207
Add: Provisions	3,134	164	(173)	3,125
Ending Balance	$              6,895	$             2,113	$                   192	$            9,200

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Operating activities :
Net income available for common shareholders	$ 9,876	$ 7,608	$ 6,996
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for loan losses	0	1,120	3,125
Provision for depreciation and amortization of premises and equipment	1,543	1,412	1,270
Deferred tax benefit (expense)	1,950	(340)	(1,216)
Net securities gains	(829)	(2,294)	(1,458)
Gains on loans sold.	(437)	(511)	(417)
Proceeds from sale of mortgage loans held for sale	21,047	28,625	24,402
Funding of mortgage loans held for sale	(18,481)	(28,065)	(23,985)
Loss on other real estate owned.	308	1,317	948
Gain (loss) on sale of premises and equipment	38	(10)	0
Amortization of investment security premiums, net of accretion of discounts	1,312	3,526	2,094
Increase in cash surrender value of life insurance contracts	(497)	(705)	(717)
(Increase) decrease in Other assets	1,243	741	1,177
Increase (decrease) in Other liabilities	(287)	2,647	534
Total adjustments	6,910	7,463	5,757
Net cash provided by operating activities	16,786	15,071	12,753
Proceeds from sales of available-for-sale securities	137,150	421,346	140,580
Proceeds from maturities and calls of available-for-sale securities	44,908	68,673	106,270
Proceeds from maturities and calls of held-to-maturity securities	3,890	3,430	4,725
Purchases of investment securities available-for-sale	(189,436)	(521,837)	(323,222)
Net (increase) decrease in loans	(38,267)	(50,846)	38,031
Proceeds from sale of other real estate owned	2,378	1,810	1,683
Proceeds from sale of premises and equipment	799	0	0
Purchases of premises and equipment	(831)	(786)	(263)
Purchase of life insurance policies	(258)	(2,282)	(2,799)
Net cash used in investing activities	(39,667)	(80,492)	(34,995)
Net increase in deposits	24,488	76,419	64,604
Net increase in securities sold under agreements to repurchase	1,027	721	10,162
Payments to FHLB borrowings	(10,100)	(7,000)	(7,000)
Repurchase of common stock	(3,722)	(3,400)	(3,011)
Cash dividends paid on common stock	$ (3,800)	$ (3,944)	$ (1,991)
Net cash provided by financing activities	7,893	62,796	62,764
Increase (decrease) in cash and cash equivalents	(14,988)	(2,625)	40,522
Cash and cash equivalents at beginning of period	70,396	73,021	32,499
Cash and cash equivalents at end of period	55,408	70,396	73,021
Cash paid during the period for expenses
Interest on deposits and borrowed funds	2,816	3,717	5,235
Income taxes	2,072	860	1,143
Loans to facilitate sale of other real estate owned	1,905	1,774	0
Real estate acquired in settlement of loans	$ 312	$ 1,355	$ 1,375

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Schedule of Impairment methodology of portfolio segment (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Impairment methodology of portfolio segment (Tables)

Schedule of Impairment methodology of portfolio segment (Tables)

The following tables detail the amount of the ALLL allocated to each portfolio segment as of December 31, 2013, 2012 and 2011, disaggregated on the basis of the Corporation’s impairment methodology:

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               342	$                118	$                    11	$              471
Loans collectively evaluated for impairment	7,017	966	141	8,124
Ending Balance	$            7,359	$             1,084	$                  152	$           8,595
December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               221	$                  82	$                      -	$              303
Loans collectively evaluated for impairment	7,307	1,027	172	8,506
Ending Balance	$            7,528	$             1,109	$                  172	$           8,809
December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$            1,111	$                131	$                      -	$           1,242
Loans collectively evaluated for impairment	5,784	1,982	192	7,958
Ending Balance	$            6,895	$             2,113	$                  192	$           9,200

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POST RETIREMENT BENEFIT PLAN - Expected benefit payments, net of participant contributions (Details) (USD $)	12 Months Ended
	Dec. 31, 2013
Expected benefit payments, net of participant contributions
Expected Future Benefit payments 2014	$ 183
Expected Future Benefit payments 2015	167
Expected Future Benefit payments 2016	178
Expected Future Benefit payments 2017	169
Expected Future Benefit payments 2018	191
Expected Future Benefit payments 2019 to 2025	935
Expected future benefit payments, total	$ 1,823

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Schedule of Fair Value Measures and Disclosures (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Fair Value Measures and Disclosures (Tables):

Fair Value, by Balance Sheet Grouping

Fair Value Measurements at December 31, 2013 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs   (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		-		778,682		-
Repurchase agreements	18,095		-		18,095		-
Accrued interest payable	663		-		663		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

Fair Value Measurements at December 31, 2012 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs   (Level 3)
Financial assets
Cash and due from banks	$	23,443	$	23,443	$	-	$	-
Interest-bearing deposits in other banks	31,953		31,953		-		-
Federal funds sold	15,000		15,000		-		-
Federal Home Loan Bank and Federal Reserve Bank stock	3,879		-		3,879		-
Securities available-for-sale	345,718		-		345,718		-
Securities held-to-maturity	31,755		-		33,420		-
Loans held for sale	2,456		2,456		-		-
Loans, net	558,350		-		-		572,277
Accrued interest receivable	4,060		-		4,060		-
Financial liabilities
Non-interest bearing deposits	169,136		169,136		-		-
Interest bearing deposits	763,713		-		766,043		-
Repurchase agreements	17,068		-		17,068		-
Advances from Federal Home Loan Bank	10,100		-		10,215		-
Accrued interest payable	754		-		754		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis, Valuation Techniques

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements as of December 31, 2013 and 2012:

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2013	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	2,214	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	208	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2012	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	4,840	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	3,385	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)

Fair Value Measurements, Nonrecurring

Nonrecurring Measurements

The following table summarizes financial assets measured at fair value on a nonrecurring basis as of December 31, 2013 and December 31, 2012, by the level within the fair value hierarchy utilized to measure fair value:

Assets measured at fair value on a nonrecurring basis as of December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	2,214	$	2,214
Other real estate owned	-		-		208		208
Assets measured at fair value on a nonrecurring basis as of December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	4,840	$	4,840
Other real estate owned	-		-		3,385		3,385

Fair Value, Assets Measured on Recurring Basis

Recurring Measurements

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012, and by the level within the fair value hierarchy utilized to measure fair value:

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
December 31, 2012
Available-For-Sale Securities	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	-	$	144,017	$	-	$	144,017
U.S. government sponsored agency mortgage backed securities	-		133,718		-		133,718
States and political subdivisions	-		50,579		-		50,579
Corporate bonds	-		17,404		-		17,404
Total assets at fair value	$	-	$	345,718	$	-	$	345,718

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Summary of details regarding the aging of the Bank's loan portfolio (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
30 - 89 Days Past Due
Consumer		$ 112
Retail
Consumer		112
Single family residential		3,543
Other retail		193
Retail total		3,848
Commercial:
Commercial and industrial		618
Non-farm, non-residential real estate		666
Construction and development		160
Commercial loans secured by real estate		22
All other commercial		741
Commercial total		2,207
Total Bank's loan portfolio		6,055
Retail
Consumer	182
Single family residential	3,805
Other retail	319
Retail total	4,306
Commercial:
Commercial and industrial	428
Non-farm, non-residential real estate	393
Commercial loans secured by real estate	38
Commercial total	859
Total Bank's loan portfolio	5,165
90 Days and Greater Past Due
Consumer		7
Retail
Consumer		7
Single family residential		387
Retail total		394
Commercial:
Commercial and industrial		1,457
Non-farm, non-residential real estate		448
Commercial loans secured by real estate		193
All other commercial		1,379
Commercial total		3,477
Total Bank's loan portfolio		3,871
Retail
Consumer	3
Single family residential	83
Other retail	28
Retail total	114
Commercial:
Commercial and industrial	1,328
Construction and development	28
Commercial loans secured by real estate	178
All other commercial	1,249
Commercial total	2,783
Total Bank's loan portfolio	2,897
Total Past Due
Consumer		119
Retail
Consumer		119
Single family residential		3,930
Other retail		193
Retail total		4,242
Commercial:
Commercial and industrial		2,075
Non-farm, non-residential real estate		1,114
Construction and development		160
Commercial loans secured by real estate		215
All other commercial		2,120
Commercial total		5,684
Total Bank's loan portfolio		9,926
Retail
Consumer	185
Single family residential	3,876
Other retail	359
Retail total	4,420
Commercial:
Commercial and industrial	1,756
Non-farm, non-residential real estate	393
Construction and development	28
Commercial loans secured by real estate	216
All other commercial	1,249
Commercial total	3,642
Total Bank's loan portfolio	8,062
Current Loans
Consumer		11,502
Retail
Consumer		11,502
Single family residential		192,419
Other retail		23,071
Retail total		226,992
Commercial:
Commercial and industrial		81,556
Non-farm, non-residential real estate		166,451
Construction and development		36,163
Commercial loans secured by real estate		23,768
All other commercial		22,303
Commercial total		330,241
Total Bank's loan portfolio		557,233
Retail
Consumer	10,772
Single family residential	209,887
Other retail	27,312
Retail total	247,971
Commercial:
Commercial and industrial	92,946
Non-farm, non-residential real estate	175,820
Construction and development	29,910
Commercial loans secured by real estate	26,724
All other commercial	25,333
Commercial total	350,733
Total Bank's loan portfolio	598,704
Total Loans
Consumer		11,621
Retail
Consumer		11,621
Single family residential		196,349
Other retail		23,264
Retail total		231,234
Commercial:
Commercial and industrial		83,631
Non-farm, non-residential real estate		167,565
Construction and development		36,323
Commercial loans secured by real estate		23,983
All other commercial		24,423
Commercial total		335,925
Total Bank's loan portfolio		567,159
Retail
Consumer	10,957
Single family residential	213,763
Other retail	27,671
Retail total	252,391
Commercial:
Commercial and industrial	94,702
Non-farm, non-residential real estate	176,213
Construction and development	29,938
Commercial loans secured by real estate	26,940
All other commercial	26,582
Commercial total	354,375
Total Bank's loan portfolio	$ 606,766

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Financial assets measured at fair value on a recurring basis (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Level 1
U.S. Government agencies		$ 0
Available-For-Sale Securities
U.S. Government agencies		0
Level 2
U.S. Government agencies		144,017
Available-For-Sale Securities
U.S. Government agencies		144,017
U.S. government sponsored agency mortgage backed securities		133,718
States and political subdivisions		50,579
Corporate bonds		17,404
Total assets at fair value		345,718
Available-For-Sale Securities
U.S. Government agencies	105,072
U.S. government sponsored agency mortgage backed securities	157,423
States and political subdivisions	46,337
Corporate bonds	20,882
Total assets at fair value	329,714
Level 3
U.S. Government agencies		0
Available-For-Sale Securities
U.S. Government agencies		0
Total value
U.S. Government agencies		144,017
Available-For-Sale Securities
U.S. Government agencies		144,017
U.S. government sponsored agency mortgage backed securities		133,718
States and political subdivisions		50,579
Corporate bonds		17,404
Total assets at fair value		345,718
Available-For-Sale Securities
U.S. Government agencies	105,072
U.S. government sponsored agency mortgage backed securities	157,423
States and political subdivisions	46,337
Corporate bonds	20,882
Total assets at fair value	$ 329,714

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Dec. 31, 2013	Dec. 31, 2012
Current Assets
Cash and due from banks	$ 20,391	$ 23,443
Interest-bearing due from banks	25,167	31,953
Federal funds sold	9,850	15,000
Total cash and cash equivalents	55,408	70,396
Securities
Securities Available-for-sale (amortized cost $346,892 and $339,971 as of December 31, 2013 and December 31, 2012, respectively)	329,714	345,718
Securities Held-to-maturity (fair market value $28,595 and $33,420 as of December 31, 2013 and December 31, 2012, respectively)	27,839	31,755
Total securities	357,553	377,473
Loans, net of deferred fees	606,766	567,159
Allowance for loan and lease losses	(8,595)	(8,809)
Net loans	598,171	558,350
Bank premises and equipment, net	24,868	26,417
Other real estate owned	1,438	5,678
Bank owned life insurance	25,867	25,112
Goodwill	9,018	9,018
Deferred tax asset	10,905	3,884
Other assets	10,605	14,035
TOTAL ASSETS	1,093,833	1,090,363
Deposits
Noninterest-bearing	179,823	169,136
Interest-bearing	777,514	763,713
Total deposits	957,337	932,849
Securities sold under agreements to repurchase	18,095	17,068
Accounts payable and accrued liabilities	15,728	15,755
Federal Home Loan Bank (FHLB) advances	0	10,100
TOTAL LIABILITIES	991,160	975,772
SHAREHOLDERS' EQUITY
Common stock - $10 par value per share, 8,000,000 shares authorized; 5,021,012 and 5,180,000 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively	50,210	51,800
Retained earnings	61,369	57,366
Accumulated other comprehensive income (loss)	(9,001)	5,330
TOTAL SHAREHOLDERS' EQUITY BEFORE NONCONTROLLING INTEREST - PREFERRED STOCK OF SUBSIDIARY	102,578	114,496
Noncontrolling interest - preferred stock of subsidiary	95	95
TOTAL SHAREHOLDERS' EQUITY	102,673	114,591
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 1,093,833	$ 1,090,363

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Concentrations of Credit Risk details
Percentage of concentrations of commercial real estate, rental and leasing loans of Tier 1 Capital plus the allowance for loan and lease losses	119.60%
Percentage of Health care and social assistance loans	46.30%
Percentage of Manufacturing and construction loans	25.40%
Percentage of Whole sale credits	25.20%
Percentage of Loans secured by non-farm, non-residential real estate	29.00%
Cash and Due From Banks
Bank's Required reserve at the Federal Reserve Bank	$ 2,560
Exceeded Federal Deposit Corp insurance limits with the amount	261
Unsecured commercial loan is considered uncollectable the loan is charged off not later than past due number of days	90
Loans and installment and revolving loans are charged off not later than number of days	120
Loans Held for sale
Loans held for sale	327	2,456
Other real estate
Policy for determining the frequency of periodic reviews is based upon consideration of the specific properties or perceived market fluctations in months minimum	12
Policy for determining the frequency of periodic reviews is based upon consideration of the specific properties or perceived market fluctations in months maximum	24
Federal Reserve and Federal Home Loan Bank Stock
Federal Reserve and Federal Home Loan Bank stock Totalled	$ 3,879	$ 3,879
Shareholders' Equity and Earnings Per Share
Corporation adopted a plan to repurchase number of shares	200,000
Corporation adopted to purchase number of shares	158,998	150,000	100,000
Corporation repurchased shares as per plan			100,000

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) PARENTHETICALS (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Comprehensive Income (Loss) Parentheticals
Tax Benefit expenses of	$ (8,507)	$ 1,204	$ 2,960
Tax on realized gains	(319)	(883)	(561)
Tax on postretirement benefits	$ (146)	$ 1,008	$ 1,214

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Allocation in the allowance for loan losses by loan segment (Details) (USD $)	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Balance of allowance for loan losses at Dec. 31, 2010	$ 7,011	$ 2,001	$ 408	$ 9,420
Less: Charge-offs	3,353	52	147	3,552
Add: Recoveries	103		104	207
Add: Provisions	3,134	164	(173)	3,125
Balance of allowance for loan losses at Dec. 31, 2011	6,895	2,113	192	9,200
Balance of allowance for loan losses at Dec. 31, 2011	6,895	2,113	192	9,200
Balance of allowance for loan losses at Dec. 31, 2011
Less: Charge-offs	1,690	176	19	1,885
Add: Recoveries	364	2	8	374
Add: Provisions	1,959	(830)	(9)	1,120
Balance of allowance for loan losses at Dec. 31, 2012	7,528	1,109	172	8,809
Balance of allowance for loan losses at Dec. 31, 2012	7,528	1,109	172	8,809
Balance of allowance for loan losses at Dec. 31, 2012
Less: Charge-offs	222	27	49	298
Add: Recoveries	53	2	29	84
Add: Provisions	0	0	0	0
Balance of allowance for loan losses at Dec. 31, 2013	$ 7,359	$ 1,084	$ 152	$ 8,595

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Schedule of Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Related Party Transactions (Tables):

Schedule of Related Party Transactions

Activity for related party transactions during 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Related party extensions of credit, beginning of period	$	3,831	$	3,829
New loans	1,116		745
Repayments	(1,125)		(743)
Related party extension of credit, end of period	$	3,822	$	3,831

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Rental expense incurred under all operating leases (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Rental expense incurred under all operating leases
Rental expense incurred for equipment leases	$ 18	$ 12	$ 13
Rental expense incurred for building leases	$ 264	$ 283	$ 236

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QUARTERLY RESULTS OF OPERATIONS (Unaudited)

12 Months Ended

Dec. 31, 2013

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

QUARTERLY RESULTS OF OPERATIONS (Unaudited)

NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following table presents unaudited quarterly interim financial information for the Corporation for the years ended December 31, 2013 and 2012:  

	First	Second	Third	Fourth
2013	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,223	$        9,523	$         9,328	$        9,287	$      37,361
Interest expense	834	751	679	643	2,907
Net interest income	8,389	8,772	8,649	8,644	34,454
Provision for possible loan losses, net	-	-	-	-	-
Noninterest income	3,329	2,620	2,509	2,658	11,116
Noninterest expenses	8,105	8,165	8,322	8,237	32,829
Income before income taxes	3,613	3,227	2,836	3,065	12,741
Income taxes	557	842	779	687	2,865
Net income	$        3,056	$        2,385	$         2,057	$        2,378	$        9,876
Basic earnings per share	0.59	0.46	0.40	0.47	1.93
Weighted average shares outstanding per quarter	5,178,759	5,133,051	5,086,469	5,046,833	5,110,849
	First	Second	Third	Fourth
2012	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,065	$        9,095	$         9,114	$        9,110	$      36,384
Interest expense	1,071	979	917	874	3,841
Net interest income	7,994	8,116	8,197	8,236	32,543
Provision for possible loan losses, net	600	520	-	-	1,120
Noninterest income	3,379	3,360	2,276	2,616	11,631
Noninterest expenses	7,754	8,424	8,145	9,207	33,530
Income before income taxes	3,019	2,532	2,328	1,645	9,524
Income taxes	690	451	373	402	1,916
Net income	$        2,329	$        2,081	$         1,955	$        1,243	$        7,608
Basic earnings per share	0.44	0.39	0.37	0.23	1.43
Weighted average shares outstanding per quarter	5,330,000	5,330,000	5,328,002	5,332,893	5,315,634

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Schedule of Future Minimum Payments operating Leases (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Future Minimum Payments operating Leases (Table):

Schedule of Future Minimum Rental Payments for Operating Leases

Future minimum lease commitments as of December 31, 2013 under all noncancelable operating leases with initial terms of one year or more are shown in the following table: 

Year	Lease Payments
2014	$                         336
2015	347
2016	320
2017	290
2018	290
Thereafter	3,942
Total	$                     5,525

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CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

12 Months Ended

Dec. 31, 2013

CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

NOTE 16 – CONDENSED FINANCIAL INFORMATION OF THE CORPORATION

The following tables present the condensed balance sheets, statements of income, comprehensive income, and cash flows of the Corporation as of December 31, 2013 and 2012: 

CONDENSED BALANCE SHEETS

	As of December 31,
	2013		2012
Cash	$	23	$	61
Investment in bank subsidiary	99,695		111,655
Investment in credit life insurance company	54		54
Investment in other securities	17		17
Dividends receivable from bank subsidiary	2,058		1,917
Cash surrender value - life insurance	4,409		4,395
Total assets	$	106,256	$	118,099
Liabilities
Accrued liabilities	$	1,820	$	1,686
Dividends payable	1,858		1,917
Total liabilities	3,678		3,603
Shareholders' equity
Common stock - $10 par value, 8,000,000 shares authorized;
5,021,012 and 5,180,000 shares issued and outstanding,
as of December 31, 2013 and December 31, 2012, respectively	50,210		51,800
Retained earnings	61,369		57,366
Accumulated other comprehensive income (loss)	(9,001)		5,330
Total shareholders' equity	102,578		114,496
Total liabilities and shareholders' equity	$	106,256	$	118,099

CONDENSED STATEMENTS OF INCOME

	Years ended December 31,
	2013		2012		2011
Operating income
Dividends from bank subsidiary	$	7,663	$	7,289	$	6,974
Other dividend income	15		18		15
Other	65		135		130
Operating expenses	(238)		(218)		(199)
Income before equity in undistributed net
income of bank subsidiary	7,505		7,224		6,920
Equity in undistributed net income of bank subsidiary	2,371		384		76
Net Income	$	9,876	$	7,608	$	6,996

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Year Ended December 31,
	2013		2012		2011
Net Income for common shareholders	$	9,876	$	7,608	$	6,996
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax expense (benefit) of ($8,507), $1,204, and $2,960	(13,589)		1,923		4,728
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively	(510)		(1,411)		(897)
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively	(232)		1,610		1,940
Other Comprehensive Income (Loss)	(14,331)		2,122		5,771
Total Comprehensive Income (Loss)	$	(4,455)	$	9,730	$	12,767

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2013		2012		2011
Operating activities
Net income for the year	$	9,876	$	7,608	$	6,996
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary	(2,371)		(384)		(76)
Increase in cash surrender value of life insurance contracts	(65)		(135)		(130)
(Increase) decrease in other assets	(90)		56		(1,972)
Decrease in payables	84		127		126
Total adjustments	(2,442)		(336)		(2,052)
Net cash provided by operating activities	7,434		7,272		4,944
Investing activities
Purchase of single premium life insurance policy	-		(310)		-
Net cash used by investing activities	-		(310)		-
Financing activities
Payment to repurchase common stock	(3,722)		(3,400)		(3,011)
Cash dividends paid	(3,800)		(3,944)		(1,991)
Advance from subsidiary	50		-		-
Net cash used by financing activities	(7,472)		(7,344)		(5,002)
Decrease in cash	(38)		(382)		(58)
Cash at beginning of year	61		443		501
Cash at end of year	$	23	$	61	$	443

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Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the Federal Statutory Rate (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the Federal Statutory Rate
Tax expense at statutory rate	$ 4,332	$ 3,238	$ 2,632
Tax exempt interest	(1,144)	(1,275)	(1,533)
Nondeductible interest expense	18	29	45
Employee benefits	(196)	(240)	(244)
Other nondeductible expenses (nontaxable income) - net	11	32	55
State income taxes net of federal tax benefit		41	(40)
Dividend income exclusion		(1)	(52)
Other tax benefit	(156)	92	(119)
Total provision for income taxes	$ 2,865	$ 1,916	$ 745
Effective tax rate	22.00%	20.00%	10.00%

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (USD $)	Preferred Stock	Shares of Stock	Common Stock	Retained Earnings USD ($)	Accumulated other Comprehensive Income Loss USD ($)	Total Stockholder's Equity USD ($)
Balance at Dec. 31, 2010	95	5,430,000	54,300	54,524	(2,563)	106,356
Net income before dividends on preferred stock of subsidiary.				$ 7,012		$ 7,012
Other comprehensive income.				0	5,771	5,771
Repurchase of common stock.		(100,000)	(1,000)	(2,011)		(3,011)
Cash dividends declared, $0.74 per share.				$ (3,963)		$ (3,963)
Cash dividends - preferred stock of subsidiary.				$ (16)		$ (16)
Balance at Dec. 31, 2011	95	5,330,000	53,300	55,546	3,208	112,149
Net income before dividends on preferred stock of subsidiary,				7,624		7,624
Other comprehensive income,					2,122	2,122
Repurchase of common stock,		(150,000)	(1,500)	(1,900)		(3,400)
Cash dividends declared, $0.74 per share,				$ (3,888)		$ (3,888)
Cash dividends - preferred stock of subsidiary,				$ (16)		$ (16)
Balance at Dec. 31, 2012	95	5,180,000	51,800	57,366	5,330	114,591
Net income before dividends on preferred stock of subsidiary'.				9,892		9,892
Other comprehensive loss'.					$ (14,331)	$ (14,331)
Repurchase of common stock'.		(158,988)	(1,590)	(2,132)		(3,722)
Cash dividends declared, $0.74 per share'.				$ (3,741)		$ (3,741)
Cash dividends - preferred stock of subsidiary'.				$ (16)		$ (16)
Balance at Dec. 31, 2013	95	5,021,012	50,210	61,369	(9,001)	102,673

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CONDENSED CONSOLIDATED BALANCE SHEETS PARENTHETICALS (USD $)	Dec. 31, 2013	Dec. 31, 2012
Stockholders equity number of shares par value and other disclosures
Available-for-sale securities, amortized cost	$ 346,892	$ 339,971
Held-to-maturity securities, fair value	$ 28,595	$ 33,420
Common Stock, par or stated value	$ 10	$ 10
Common Stock, shares authorized	8,000,000	8,000,000
Common Stock, shares issued	5,021,012	5,180,000
Common Stock, shares outstanding	5,021,012	5,180,000

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FEDERAL AND STATE INCOME TAXES

12 Months Ended

Dec. 31, 2013

FEDERAL AND STATE INCOME TAXES

FEDERAL AND STATE INCOME TAXES

NOTE 9 – FEDERAL AND STATE INCOME TAXES

                The following table presents components of income tax expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011:

	2013		2012		2011
Current	$	915	$	2,256	$	1,960
Deferred	1,950		(340)		(1,216)
Total provision for income taxes	2,865		1,916		744
Deferred Tax Effects of Principal Temporary Differences	2013		2012		2011
Allowance for possible loan losses	$	3,309	$	3,392	$	3,519
Deferred compensation	2,516		2,420		2,234
Write down of other real estate	314		1,152		1,621
Deferred gain on OREO sale	188		202		-
Amortization of core deposit intangible	(272)		423		575
Recognition of nonaccrual loan income	111		152		66
Unrealized gains (losses) on available-for-sale securities	6,613		(2,212)		(1,892)
Post retirement benefit obligation	1,849		1,733		1,643
Accelerated depreciation	(822)		(630)		(562)
Amortization of goodwill	(2,591)		(2,376)		(2,152)
Alternative Minimum Tax	-		402		422
Dividend Income - F&M West	(372)		(219)		(241)
Prepaid Expenses	(178)		(185)		-
Other	(304)		(368)		(360)
Net deferred tax asset	$	10,905	$	3,884	$	4,872
Reconciliation of Total Income Taxes Reported with the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)	2013		2012		2011
Tax expense at statutory rate	$	4,332	$	3,238	$	2,632
Increase (decrease) in taxes resulting from:
Tax exempt interest	(1,144)		(1,275)		(1,533)
Nondeductible interest expense	18		29		45
Employee benefits	(196)		(240)		(244)
Other nondeductible expenses
(nontaxable income) - net	11		32		55
State income taxes net of federal tax benefit	-		41		(40)
Dividend income exclusion	-		(1)		(52)
Other	(156)		92		(119)
Total provision for income taxes	$	2,865	$	1,916	$	745
Effective tax rate	22.4%		20.1%		9.6%

The Corporation and one of its subsidiaries file consolidated income tax returns with the Internal Revenue Service and State of Tennessee.  The Corporation is not subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.  There was no valuation allowance for deferred tax assets at December 31, 2013 and 2012.  Management believes it is more-likely-than-not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years. 

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Mar. 01, 2014	Jun. 30, 2013
Document and Entity Information:
Entity Registrant Name	FIRST FARMERS & MERCHANTS CORP
Document Type	10-K
Document Period End Date	Dec. 31, 2013
Amendment Flag	false
Entity Central Index Key	0000703329
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding			121,936,983
Entity Public Float		$ 5,021,012
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY

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BORROWED FUNDS

12 Months Ended

Dec. 31, 2013

BORROWED FUNDS

BORROWED FUNDS

NOTE 10 – BORROWED FUNDS

The Bank is a party to the Blanket Agreement for Advances and Security Agreement (the “Blanket Agreement”) with the Federal Home Loan Bank of Cincinnati (the “FHLB”).  Advances made to the Bank under the Blanket Agreement are collateralized by the FHLB stock and qualifying residential mortgage loans totaling 150% of the outstanding amount borrowed.  These collateralization matters are outlined in the Blanket Agreement dated June 20, 2006 between the Bank and the FHLB.  Outstanding advances at December 31, 2013 and 2012 were $0 and $10,100, respectively.

Stock held in the FHLB totaling $3,009 at December 31, 2013 is carried at cost.  The stock is restricted and can only be sold back to the FHLB at par.

The Bank has a Cash Management Advance Line of Credit Agreement (the “CMA”) dated June 21, 2010, with the Federal Home Loan Bank.  The CMA is a component of the Blanket Agreement.  The purpose of the CMA is to assist with short-term liquidity management.  Under the terms of the CMA, the Bank 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 December 31, 2013.

Short-term borrowings included the following at December 31:

	2013	2012
Securities sold under repurchase agreements	$       18,095	$       17,068

Securities sold under agreements to repurchase consist of obligations of the Bank to other parties.  The obligations are secured by investment securities and such collateral is held by in safekeeping by a third party.  The maximum amount of outstanding agreements at any month end during 2013 and 2012 totaled $22,359 and $22,598, respectively, and the monthly average of such agreements totaled $19,052 and $18,657 for 2013 and 2012, respectively.  The agreements at December 31, 2013, mature January 2, 2014.

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POST RETIREMENT BENEFIT PLAN - Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Amounts not recognized as components of net periodic benefit cost
Unrecognized net actuarial (gain) loss	$ 2,490	$ 2,920
Unrecognized prior service cost	52
Total (before tax effects)	$ 2,542	$ 2,920

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 28,653	$ 27,951	$ 29,838
Income on investment securities
Taxable interest	5,501	4,967	4,219
Exempt from federal income tax	2,913	3,106	3,616
Dividends	294	360	295
Total interest income	37,361	36,384	37,968
INTEREST EXPENSE
Interest on deposits	2,694	3,343	4,223
Interest on other borrowings	213	498	719
Total interest expense	2,907	3,841	4,942
Net interest income	34,454	32,543	33,026
Provision for loan and lease losses	0	1,120	3,125
Net interest income after provision	34,454	31,423	29,901
Gain on loans sold,	437	511	469
Trust department income	2,298	2,119	1,999
Service fees on deposit accounts	6,479	6,689	6,784
Brokerage fees	361	231	36
Earnings on bank owned life insurance	497	705	717
Gain on sale of securities	829	2,294	1,458
Loss on foreclosed property,	(308)	(1,317)	(948)
Other non-interest income	523	399	457
Total noninterest income	11,116	11,631	10,972
NON INTEREST EXPENSE
Salaries and employee benefits	17,901	19,406	18,836
Net occupancy expense	2,581	2,528	2,488
Furniture and equipment expense	1,397	1,334	1,224
Data processing expense	2,288	2,007	1,867
Legal and professional fees	1,037	943	997
Stationary and office supplies	293	279	286
Advertising and promotions	1,090	1,179	1,217
FDIC Insurance premium expense	728	703	875
Other real estate expense	128	309	640
Other noninterest expense	5,370	4,826	4,687
Total noninterest expenses	32,813	33,514	33,117
Income before provision for income taxes	12,757	9,540	7,756
Provision for income taxes	2,865	1,916	744
Net income before noncontrolling interest - dividends on preferred stock of subsidiary	9,892	7,624	7,012
Noncontrolling interest-dividends on preferred stock subsidiary	16	16	16
Net income for common shareholders.	$ 9,876	$ 7,608	$ 6,996
EARNING PER SHARE
Weighted Average Shares Outstanding	5,110,849	5,315,634	5,393,765
Earnings per share	$ 1.93	$ 1.43	$ 1.30

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LOANS

12 Months Ended

Dec. 31, 2013

LOANS

LOANS

NOTE 4 – LOANS

The following table presents the Bank’s loans by category as of December 31, 2013 and 2012:

	December 31, 2013		December 31, 2012
Commercial
Commercial and industrial	$	94,702	$	83,631
Non-farm, nonresidential real estate	176,213		167,565
Construction and development	29,938		36,323
Commercial loans secured by real estate	26,940		23,983
Other commercial	26,582		24,423
Total commercial	354,375		335,925
Residential
Consumer loans	10,957		11,621
Single family residential	213,763		196,349
Other retail	27,671		23,264
Total residential and consumer	252,391		231,234
	$	606,766	$	567,159
Less:
Allowance for possible loan losses	(8,595)		(8,809)
Total net loans	$	598,171	$	558,350

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 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 the borrower’s ability to operate profitably and prudently expand its business.  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 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 December 31, 2013, approximately seventy percent of the outstanding principal balance of the Corporation’s commercial real estate loans was secured by owner-occupied properties, compared to eighty percent at December 31, 2012.

With respect to loans to developers and builders 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 due to 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 residential and consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer 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.

The goal of the bank 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.  A concentration of credit occurs when obligations, direct or indirect, of the same or affiliated interests represent 15 percent or more of the Bank’s capital structure.  Commercial real estate rental and leasing represented the highest concentration at 120% of tier 1 capital.  The Board of Directors recognizes that the Bank’s geographic trade area imposes some limitations regarding loan diversification if the bank is to perform the function for which it has been chartered.  Specifically, lending to qualified borrowers within the bank’s trade area will naturally cause concentrations of real estate loans in the primary communities served by the bank and loans to employees of major employers in the area.

             The following table provides details regarding the aging of the Bank’s loan portfolio:

December 31, 2013	30 - 89 Days Past Due		90 Days and Greater Past Due		Total Past Due		Current		Total Loans
Retail
Consumer	$	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 estate	38		178		216		26,724		26,940
All 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
December 31, 2012	30 - 89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Past Due		Current		Total Loans
Retail
Consumer	$	112	$	7	$	119	$	11,502	$	11,621
Single family residential	3,543		387		3,930		192,419		196,349
Other retail	193		-		193		23,071		23,264
Retail total	$	3,848	$	394	$	4,242	$	226,992	$	231,234
Commercial
Commercial and industrial	$	618	$	1,457	$	2,075	$	81,556	$	83,631
Non-farm, non-residential real estate	666		448		1,114		166,451		167,565
Construction and development	160		-		160		36,163		36,323
Commercial loans secured by real estate	22		193		215		23,768		23,983
All other commercial	741		1,379		2,120		22,303		24,423
Commercial total	$	2,207	$	3,477	$	5,684	$	330,241	$	335,925
Total	$	6,055	$	3,871	$	9,926	$	557,233	$	567,159

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

The following table summarizes the impaired loans by loan type as of December 31, 2013 and 2012:

December 31, 2013	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$		2,190	$		1,338	$	234	$	1,572		$	16		$	1,620		$	23		$	134
Non-farm, non-residential real estate	3,236			1,155			1,551		2,706			282			2,819			157			168
Construction and development	461			461			-		461			44			556			30			30
Other commercial	3,834			3,310			178		3,488			-			3,704			225			241
Commercial total	9,721			6,264			1,963		8,227			342			8,699			435			573
Retail
Single family residential	1,121			568			419		987			118			1044			52			55
Other retail	11			-			11		11			11			11
Retail total	1,132			568			430		998			129			1,097			52			55
Total	$		10,853	$		6,382	$	2,393	$	9,225		$	471		$	9,796		$	487		$	628
December 31, 2012	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$		2,036	$		1,076	$	328	$	1,404		$	103		$	3,483		$	74		$	259
Non-farm, non-residential real estate	3,613			2,417			-		2,417			-			1,606			83			78
Construction and development	682			-			682		682			118			682			35			40
Other commercial	3,124			3,124			-		3,124						3,520			126			279
Commercial total	9,455			6,617			1,010		7,627			221			9,291			318			656
Retail
Single family residential	1,237			402			613		1,015			82			638			39			64
Retail total	1,237			402			613		1,015			82						39			64
Total	$	10,692		$	7,019		$	1,623	$	8,642		$	303		$	9,291		$	357		$	720
December 31, 2011	Unpaid Contractual Principal Balance			Recorded investment with no allowance			Recorded Investment with allowance		Total Recorded Investment			Related Allowance			Average Recorded Investment Year To Date			Interest Received			Interest Accrued
Commercial
Commercial and industrial	$	5,839		$	738		$	5,678	$	5,446		$	601		$	5,069		$	193		$	337
Non-farm, non-residential real estate	4,378			2,986			2,115		4,573			307			5,232			35			70
Construction and development	870			-			870		870			203			941			39			45
Other commercial	3,238			-			-		1,498			-			1,527			190			310
Commercial total	14,325			3,724			8,663		12,387			1,111			12,769			457			762
Retail
Single family residential	1,388			142			1,075		1,217			131			1,269			44			68
Retail total	1,388			142			1,075		1,217			131			1,269			44			68
Total	$	15,713		$	3,866		$	9,738	$		13,604	$		1,242	$		14,038	$		501	$	830

* Interest income received is recognized interest income and approximates cash basis.

            Non-accrual loans, segregated by class of loans, were as follows at December 31, 2013 and 2012:

	2013		2012
Commercial and industrial	$	1,649	$	1,595
Nonfarm, nonresidential real estate	737		1,372
Construction and development	68		50
Commercial real estate	6		126
Other commercial	1,248		1,379
Consumer	21		11
Single family residential	1,667		3,541
Total	$	5,396	$	8,074

Included in certain loan 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 and/or interest payments, regardless of the period of the modification.  All of the loans identified as troubled debt restructuring were modified due to 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 determined 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.

As of December 31, 2013, the Corporation did not have any commitments to extend additional funds to borrowers with loans modified and included as a troubled debt restructuring.

During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012:

		2013					2012
		Post - Modification		Net Charge-offs			Post -Modification		Net Charge-offs
	Number of	Outstanding		Resulting from		Number of	Outstanding		Resulting from
(dollars in thousands)	Loans	Balance		Modifications		Loans	Balance		Modifications
Commercial:
Commercial and industrial	-	$	-	$	-	1	$	8	$	-
Nonfarm nonresidential	-	-		-		1	361		-
Retail:
Consumer	3	8		-		1	3		-
Single family residential	3	167		6		3	237		-
Total trouble debt restructurings	6	$	175	$	6	6	$	609	$	-

Loans retain their accrual status at the time of their modification.  As a result, if a loan is on nonaccrual status at the time it is modified, it stays as no-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 losses 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 or transferred to nonaccrual. 

As of December 31, 2013 and 2012, the Corporation did not have any loans that were modified in troubled debt restructurings during the past twelve months that have subsequently defaulted. 

Credit Quality Indicators. As part of the on-going 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 commercials loans.  Loans are graded on a scale of 1 – 8.  A description of the general characteristics of the 8 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 its 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.

·         Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade A or higher.

·         A cash secured loan with the cash on deposit in our bank 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.

·         Borrower has a strong market position in its industry and has an abundance of financeable assets available to protect the bank’s position.

·         Proven and steady management with good management succession.

·         Borrower can withstand major market instabilities of short duration.

·         Credit rating by Moody’s, Standard & Poor, or other qualified rating agency that is grade BAA or higher.

22

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.

·         Liquidity and leverage is in line with industry norms.

·         Good management with acceptable management succession.

·         Under most economic and business conditions 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.

·         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; divorce, or health condition of the owner or key management person.  The Risk Rating 5 category may be used in transitional upgrades as well as transitional downgrades of credit relationships.  Under these criteria, the risk rating 5 necessitates a plan of action to either upgrade the credit to a Pass rating (Risk Rating 1-4), downgrade the credit to a criticized asset, or exit the relationship within six months.

B) Ongoing Supervision Warranted - This risk rating 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 the Pass / Watch risk rating, 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 Pass / Watch rating can be eliminated or effectively mitigated.

·         Borrowers 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 bank’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.

·         Management is of good character although some management weakness may exist, including lack of depth or succession.

·         Borrowers generally have 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:

·         Cash flow may not be sufficient to fund anticipated cash needs.

·         Sufficiently or modestly sufficiently financeable assets are available to protect the bank’s position.

·         Adverse trends in operations/profits or unbalanced position in the 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.

·         Business exhibits a deteriorating market position in the industry.

·         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 bank will sustain some loss if the deficiencies are not corrected.

General Characteristics:

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

·         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 deficiencies are not corrected.

·         Cash flow is generally not sufficient to fund anticipated cash needs.

·         Financeable assets may not be sufficient to protect the bank’s position.

·         Adverse trends in 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.

·         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 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 an adequate secondary source of repayment on a best-case basis.

·         Borrowers have 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 proposed merger or acquisition; liquidation procedures; capital injections; perfecting liens on additional collateral; and refinancing plans.

·         Cash flow is insufficient to fund cash needs.

·         Financeable assets are insufficient to protect the bank’s position.

·         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.

The following table presents risk grades and classified loans by class for year ending December 31, 2013 and 2012:

December 31, 2013
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial and Industrial		Non-Farm, Non-Residential Real Estate Loans		Construction and Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial 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 delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		10,9366	$	212,096	$	27,643	$	250,675
Nonperforming*	21			1,667		28		1,716
TOTALS	$	10,957		$	213,763	$	27,671	$	252,391

December 31, 2012
Commercial Loan Portfolio:  Credit risk profile by internally assigned grade	Commercial and Industrial			Non-Farm, Non-Residential Real Estate Loans		Construction and  Development		Commercial Loans Secured by Residential R/E		All Other Commercial Loans		Commercial Loan Totals
Pass	$		81,560	$	164,290	$	35,543	$	21,660	$	22,857	$	325,910
Special Mention	269			815		98		398		-		1,580
Substandard	726			2,460		682		1,925		187		5,980
Doubtful	1,076			-		-		-		1,379		2,455
TOTALS	$		83,631	$	167,565	$	36,323	$	23,983	$	24,423	$	335,925
Retail Loan Portfolio:  Credit risk profiles based on delinquency status classification	Consumer Loans			Single-Family Residential**		All Other Retail Loans		Retail Loan Totals
Performing	$		11,610	$	192,808	$	23,131	$	227,549
Nonperforming*	11			3,541		133		3,685
TOTALS	$	11,621		$	196,349	$	23,264	$	231,234

*Loans are classified as nonperforming loans and are automatically placed on nonaccrual status once they reach 90 days past due.  For purposes of this table all loans graded substandard or below are including in nonperforming.

**Single-family residential loans includes primary liens, closed-end secondary liens, residential construction loans, and home equity lines of credit.

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SECURITIES

12 Months Ended

Dec. 31, 2013

SECURITIES

SECURITIES

NOTE 3 – SECURITIES

                The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are summarized as follows:

	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
	Amortized			Gross Unrealized				Fair
December 31, 2012	Cost			Gains		Losses		Value
Available-for-sale securities
U.S. Government agencies	$		143,897	$	400	$	280	$	144,017
U.S. Government sponsored agency mortgage backed securities	131,917			1,856		55		133,718
States and political subdivisions	47,273			3,306		-		50,579
Corporate bonds	16,884			529		9		17,404
	$	339,971		$	6,091	$	344	$	345,718
Held-to-maturity securities
States and political subdivisions	$	31,755		$	1,665	$	-	$	33,420

            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 December 31, 2013 and 2012 was approximately $269,691 and $83,579, which was approximately 75% and 22%, respectively, of the Corporation’s available-for-sale and held-to-maturity investment portfolio.  The Corporation evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of December 31, 2013 and December 31, 2012 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 December 31, 2013 and 2012:

	Less than 12 months		12 months or Greater		Total
December 31, 2013	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$   100,533	$        7,330	$       4,539	$           461	$ 105,072	$        7,791
US 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
	Less than 12 months		12 months or Greater		Total
December 31, 2012	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
Type of Security	Value	Losses	Value	Losses	Value	Losses
US Government agencies	$     68,979	$           280	$              -	$                -	$   68,979	$           280
US Government sponsored agency mortgage
backed securities	12,881	55	-	-	12,881	55
Corporate bonds	1,719	9	-	-	1,719	9
	$     83,579	$           344	$              -	$                -	$   83,579	$           344

The unrealized losses on the Corporation’s investments in direct obligation of U.S. government agencies and U.S. government sponsored agency mortgage backed securities were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, 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
December 31, 2013	Amortized	Estimated	Amortized	Estimated
	Cost	Fair Value	Cost	Fair Value
Within one year	$      5,841	$        5,920	$     3,135	$         3,208
One to five years	26,404	26,489	7,043	7,305
Five to ten years	131,468	124,308	16,554	16,953
After ten years	15,134	15,574	1,107	1,129
Mortgage-backed securities	168,045	157,423	-	-
Total	$  346,892	$    329,714	$   27,839	$       28,595

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $210,494 at December 31, 2013 and $210,800 at December 31, 2012.

The book value of securities sold under agreements to repurchase amounted to $34,978 and $26,500 at December 31, 2013 and 2012, respectively.

Gross gains of $1,026, $2,455and $1,509 resulting from sales of available-for-sale securities were realized for at December 31, 2013, 2012 and 2011, respectively.  A loss of $197 was included in the net gain of $829 for December 31, 2013.  A loss of $161 was included in the net gain of $2,294 for December 31, 2012.  Losses of $51 were included in the net gain of $1,458 for December 31, 2011.

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DEPOSITS

12 Months Ended

Dec. 31, 2013

DEPOSITS

DEPOSITS

NOTE 15 – DEPOSITS

            The Bank does not have any foreign offices and all deposits are serviced in its 16 domestic offices.  Maturities of time deposits of $100 or more at December 31, 2013 and 2012 are as follows:

	2013	2012
Under 3 months	$     31,514	$       28,504
3 to 12 months	$     63,429	64,639
Over 12 months	$     27,834	27,018
Total	$   122,777	$     120,161

The following table presents maturities of interest-bearing time deposits as of December 31, 2013:

2014	$      185,687
2015	$        25,422
2016	$        14,712
2017	$          7,120
2018	$          5,893
Thereafter	$                -
Total	$      238,834

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SIGNIFICANT ESTIMATES, COMMITMENT AND CONTINGENCIES

12 Months Ended

Dec. 31, 2013

SIGNIFICANT ESTIMATES, COMMITMENT AND CONTINGENCIES

SIGNIFICANT ESTIMATES, COMMITMENT AND CONTINGENCIES

NOTE 11 – SIGNIFICANT ESTIMATES, COMMITMENTS AND CONTINGENCIES

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in the footnote regarding loansOther significant estimates and concentrations not discussed in those footnotes include:

General Litigation

The Corporation is subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Corporation.

Pension and Other Postretirement Benefit Obligations

The Corporation has a noncontributory defined benefit postretirement health care plan whereby it agrees to provide certain postretirement benefits to eligible employees.  The benefit obligation is the actuarial present value of all benefits attributed to service rendered prior to the valuation date based on the projected unit credit cost method.  It is reasonably possible that events could occur that would change the estimated amount of this liability materially in the near term.

Current Economic Conditions

The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. 

The accompanying financial statements have been prepared using values and information currently available to the Corporation.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Corporation’s ability to meet regulatory capital requirements and maintain sufficient liquidity.  Furthermore, the Corporation’s regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Corporation’s measurement of regulatory capital and compliance with the capital adequacy guidelines under the regulatory framework for prompt corrective action.

Commitments and Credit Risk

The Corporation grants agribusiness, commercial and residential loans to customers throughout the state.  The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in those particular financial instruments.

Commitments to Originate Loans

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Mortgage loans in the process of origination represent amounts that the Corporation plans to fund within a normal period of 30 to 90 days, and which are intended for sale to investors in the secondary market.  Total mortgage loans in process of origination were $407and $9,488, at December 31, 2013 and 2012, respectively.  Total mortgage loans held for sale amounted to $327 and $2,456, at December 31, 2013 and 2012, respectively.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under nonfinancial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  Should the Corporation be obligated to perform under the standby letters of credit, the Corporation may seek recourse from the customer for reimbursement of amounts paid.

The Corporation had total outstanding standby letters of credit amounting to $11,384 and $9,070, at December 31, 2013 and 2012, respectively, with terms ranging from seven days to 23 years. 

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Lines of credit generally have fixed expiration dates.  Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2013, the Corporation had granted unused lines of credit to borrowers aggregating approximately $79,150 and $44,318 for commercial lines and open-end consumer lines, respectively.  At December 31, 2012, unused lines of credit to borrowers aggregated approximately $64,455 for commercial lines and $45,302 for open-end consumer lines.

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POST RETIREMENT BENEFIT PLAN Compensation and Retirement (Details) (USD $)	12 Months Ended
	Dec. 31, 2013
Compensation and Retirement
Estimated future employer contributions	$ 145
Estimated net loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year	188
The Corporation will pay a post retirement bonus equal to to employees (i) who were hired prior to March 20, 2007	$ 20,000

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2013

Related Party Transactions

RELATED PARTY TRANSACTIONS

NOTE 7 – RELATED PARTY TRANSACTIONS

            Certain related parties (primarily directors and senior officers of the Corporation or the Bank, including their affiliates, families and companies in which they hold 10% or more ownership) were customers of, and had loans and other transactions with, the Bank in the ordinary course of business.  An analysis of the activity with respect to such loans for

the years ended December 31, 2013 and 2012 is shown in the table below (dollars in thousands).  These totals exclude loans made in the ordinary course of business to other companies with which neither the Corporation nor the Bank had a relationship other than the association of one of its directors in the capacity of officer or director.  These loan transactions were made on substantially the same terms as those prevailing at the time for comparable loans to other persons.  They did not involve more than the normal risk of collectability or present other unfavorable features.  No related party loans were charged off in 2013 or 2012.

            Activity for related party transactions during 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Related party extensions of credit, beginning of period	$	3,831	$	3,829
New loans	1,116		745
Repayments	(1,125)		(743)
Related party extension of credit, end of period	$	3,822	$	3,831

The aggregate balances of related party deposits at December 31, 2013 and 2012 were $15,724 and $15,984, respectively.

The aggregate balances of related party repurchase agreements at December 31, 2013 and 2012 were $9,079 and $8,694, respectively.

The Corporation and Bank utilize various services and purchased good provided by certain related parties. Significant services provided by a director during 2013 totaled $38, which was for consulting services.  For 2012, these services totaled $1,105, which was for building contractor services.

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Allowance for loan losses allocated to each portfolio segment disaggregated on the basis of the Corporation's impairment methodology (Details) (USD $)	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2010	$ 0
Loans individually evaluated for impairment	1,111	131		1,242
Loans collectively evaluated for impairment	5,784	1,982	192	7,958
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2011	6,895	2,113	192	9,200
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2011
Loans individually evaluated for impairment	221	82		303
Loans collectively evaluated for impairment	7,307	1,027	172	8,506
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2012	7,359	1,084	152	8,595
Balance of allowance for loan losses allocated to each portfolio segment at Dec. 31, 2012	$ 7,528	$ 1,109	$ 172	$ 8,809

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ALLOWANCE FOR LOAN AND LEASE LOSSES

12 Months Ended

Dec. 31, 2013

ALLOWANCE FOR LOAN AND LEASE LOSSES:

ALLOWANCE FOR LOAN AND LEASE LOSSES

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible 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 allowance for possible loan

loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.”  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 allowance for possible loan losses is designed to account for credit deterioration as it occurs.  The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.  The provision for possible 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 allowance for possible loan losses 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, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Corporation’s allowance for possible loan losses 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 similar 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.  Commercial 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 a calculated grade of 7 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 allowance for possible loan losses 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 periodically updated 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 the total dollar amount 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 allowance for loan and lease losses (“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.

The allowance for loan losses 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, know 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 Corporation uses a rolling eight quarters historic loss period for all segments when estimating the historic charge off rates calculated in accordance with ASC Topic 450 and incorporates environmental factors for various components such as economic conditions, trends in delinquencies, loan review assessments, credit concentrations and level of underperforming ratios. 

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.  In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of the Corporation’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan

portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of changes to interest rates on portfolio risk.  Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis.  Each component is determined to have either a high, moderate or low degree of risk.  The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

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.

Loans identified as losses by management and internal loan review are charged-off.  Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

The following table summarizes the allocation in the allowance for loan losses by loan segment for the years ended December 31, 2013, 2012 and 2011: 

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,528	$             1,109	$                   172	$             8,809
Less: Charge-offs	222	27	49	298
Add: Recoveries	53	2	29	84
Add: Provisions	-	-	-	-
Ending Balance	$              7,359	$             1,084	$                   152	$             8,595

December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              6,895	$             2,113	$                   192	$          9,200
Less: Charge-offs	1,690	176	19	1,885
Add: Recoveries	364	2	8	374
Add: Provisions	1,959	(830)	(9)	1,120
Ending Balance	$            7,528	$           1,109	$                  172	$          8,809

December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Beginning Balance	$              7,011	$             2,001	$                   408	$            9,420
Less: Charge-offs	3,353	52	147	3,552
Add: Recoveries	103	-	104	207
Add: Provisions	3,134	164	(173)	3,125
Ending Balance	$              6,895	$             2,113	$                   192	$            9,200

The following tables detail the amount of the ALLL allocated to each portfolio segment as of December 31, 2013, 2012 and 2011, disaggregated on the basis of the Corporation’s impairment methodology:

December 31, 2013	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               342	$                118	$                    11	$              471
Loans collectively evaluated for impairment	7,017	966	141	8,124
Ending Balance	$            7,359	$             1,084	$                  152	$           8,595
December 31, 2012	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$               221	$                  82	$                      -	$              303
Loans collectively evaluated for impairment	7,307	1,027	172	8,506
Ending Balance	$            7,528	$             1,109	$                  172	$           8,809
December 31, 2011	Commercial	Residential Real Estate	Consumer and Other Retail	Totals
Loans individually evaluated for impairment	$            1,111	$                131	$                      -	$           1,242
Loans collectively evaluated for impairment	5,784	1,982	192	7,958
Ending Balance	$            6,895	$             2,113	$                  192	$           9,200

The following table shows loans as of December 31, 2013, 2012 and 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Bank’s impairment methodology:

December 31, 2013	Commercial			Residential Real Estate		Consumer & 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
December 31, 2012	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		7,627	$	1,015	$	-	$	8,642
Loans collectively evaluated for impairment	328,298			195,334		34,885		558,517
Ending Balance	$		335,925	$	196,349	$	34,885	$	567,159
December 31, 2011	Commercial			Residential Real Estate		Consumer & Other Retail		Totals
Loans individually evaluated for impairment	$		12,387	$	1,217	$	-	$	13,604
Loans collectively evaluated for impairment	268,536			221,365		14,297		504,198
Ending Balance	$	280,923		$	222,582	$	14,297	$	517,802

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PREMISES AND EQUIPMENT

12 Months Ended

Dec. 31, 2013

Premises and Equipment

PREMISES AND EQUIPMENT

NOTE 6 – PREMISES AND EQUIPMENT

The following table presents the Corporation’s assets by category at December 31, 2013 and 2012: 

	2013		2012
Land	$	8,223	$	9,003
Premises	22,765		22,717
Furniture and equipment	9,367		9,401
Leasehold improvements	1,095		1,319
	41,450		42,440
Less allowance for depreciation and amortization	(16,582)		(16,023)
	$	24,868	$	26,417

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LEASES

12 Months Ended

Dec. 31, 2013

LEASES

LEASES

NOTE 8 – LEASES

            Real property for four of the Bank’s office locations and certain equipment are leased under noncancelable operating leases expiring at various times through 2028.  In most cases, the leases provide for one or more renewal options of five to ten years under the same or similar terms.  In addition, various items of office equipment are leased under cancelable operating leases.  Total rental expense incurred under all operating leases, including short-term leases with terms of less than one month, amounted to approximately $18, $12 and $13 for equipment leases and approximately $264, $283 and $236 for building leases in 2013, 2012 and 2011, respectively.  Future minimum lease commitments as of December 31, 2013 under all noncancelable operating leases with initial terms of one year or more are shown in the following table: 

Year	Lease Payments
2014	$                         336
2015	347
2016	320
2017	290
2018	290
Thereafter	3,942
Total	$                     5,525

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Future minimum lease commitments under all noncancelable operating leases (Details) (USD $)	Dec. 31, 2013
Future minimum lease commitments under all noncancelable operating leases
Future minimum Lease Payments2014	$ 336
Future minimum Lease Payments2015	347
Future minimum Lease Payments2016	320
Future minimum Lease Payments2017	290
Future minimum Lease Payments2018	290
Future minimum Lease PaymentsThereafter	3,942
Future minimum Lease PaymentsTotal	$ 5,525

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Income tax expense attributable to continuing operations (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income tax expense attributable to continuing operations
Current	$ 915	$ 2,256	$ 1,960
Deferred	1,950	(340)	(1,216)
Total provision for income taxes	$ 2,865	$ 1,916	$ 745

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Activity for related party transactions during the period is as follows (dollars in thousands) (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Activity for related party transactions during the period is as follows
Related party extensions of credit, beginning of period	$ 3,831	$ 3,829
New loans	1,116	745
Repayments	(1,125)	(743)
Related party extension of credit, end of period	3,822	3,831
The aggregate balances of related party deposits	15,724	15,984
The aggregate balances of related party repurchase agreements	9,079	8,694
Significant services provided by a director for consulting services	38
Significant services provided by a director for building contractor services		$ 1,105

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Schedule of Premises and Equipment. (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Premises and Equipment. (Tables):

Schedule of Premises and Equipment (Tables)

The following table presents the Corporation’s assets by category at December 31, 2013 and 2012: 

	2013		2012
Land	$	8,223	$	9,003
Premises	22,765		22,717
Furniture and equipment	9,367		9,401
Leasehold improvements	1,095		1,319
	41,450		42,440
Less allowance for depreciation and amortization	(16,582)		(16,023)
	$	24,868	$	26,417

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Gross gains and losses of Securities (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Gross gains and losses of Securities
The carrying value of securities pledged as collateral to secure public deposits and for other purposes	$ 210,494	$ 210,800
The book value of securities sold under agreements to repurchase	34,978	26,500
Gross gains resulting from sales of available for sale securities were realized	1,026	2,455	1,509
Loss included in the net gains	197	161	51
Net gains resulting from sales of available for sale securities were realized	$ 829	$ 2,294	$ 1,458

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FAIR VALUE MEASUREMENT

12 Months Ended

Dec. 31, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENT

NOTE 13 – FAIR VALUE MEASUREMENT

The fair value of an asset or liability is the price that would be received to sell 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.

Recurring Measurements

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012, and by the level within the fair value hierarchy utilized to measure fair value:

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
December 31, 2012
Available-For-Sale Securities	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	-	$	144,017	$	-	$	144,017
U.S. government sponsored agency mortgage backed securities	-		133,718		-		133,718
States and political subdivisions	-		50,579		-		50,579
Corporate bonds	-		17,404		-		17,404
Total assets at fair value	$	-	$	345,718	$	-	$	345,718

The following 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 have been no significant changes in the valuation techniques during the year ended December 31, 2013. 

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 bond’s 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 December 31, 2013 and December 31, 2012, by the level within the fair value hierarchy utilized to measure fair value:

Assets measured at fair value on a nonrecurring basis as of December 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	2,214	$	2,214
Other real estate owned	-		-		208		208
Assets measured at fair value on a nonrecurring basis as of December 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans (collateral-dependent)	$	-	$	-	$	4,840	$	4,840
Other real estate owned	-		-		3,385		3,385

Impaired Loans (Collateral-Dependent)

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 in the environment 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 were approximately $79 at December 31, 2013 and $3,300 at December 31, 2012.

            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 creditor 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 partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value.

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.  Fair value adjustments were approximately $395 at December 31, 2013 and $1,200 at December 31, 2012.

            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.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements as of December 31, 2013 and 2012:

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2013	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	2,214	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	208	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2012	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral-dependent)	$	4,840	Market comparable properties	Marketability discount	5.0% - 10.0% (7%)
Other real estate/assets owned	$	3,385	Market comparable properties	Marketability 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 is 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 funds sold – 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.

Loans (net of the allowance for loan  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.

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.

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 tables present estimated fair values of the Corporation’s financial instruments as of December 31, 2013 and 2012, and indicate the levels within the fair value hierarchy of the valuation techniques:

Fair Value Measurements at December 31, 2013 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs   (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		-		778,682		-
Repurchase agreements	18,095		-		18,095		-
Accrued interest payable	663		-		663		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

Fair Value Measurements at December 31, 2012 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs   (Level 3)
Financial assets
Cash and due from banks	$	23,443	$	23,443	$	-	$	-
Interest-bearing deposits in other banks	31,953		31,953		-		-
Federal funds sold	15,000		15,000		-		-
Federal Home Loan Bank and Federal Reserve Bank stock	3,879		-		3,879		-
Securities available-for-sale	345,718		-		345,718		-
Securities held-to-maturity	31,755		-		33,420		-
Loans held for sale	2,456		2,456		-		-
Loans, net	558,350		-		-		572,277
Accrued interest receivable	4,060		-		4,060		-
Financial liabilities
Non-interest bearing deposits	169,136		169,136		-		-
Interest bearing deposits	763,713		-		766,043		-
Repurchase agreements	17,068		-		17,068		-
Advances from Federal Home Loan Bank	10,100		-		10,215		-
Accrued interest payable	754		-		754		-
Off-balance sheet credit related instruments:
Commitments to extend credit and letters of credit			-		-		-

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POST RETIREMENT BENEFIT PLAN

12 Months Ended

Dec. 31, 2013

POST RETIREMENT BENEFIT PLAN

POST RETIREMENT BENEFIT PLAN

NOTE 18 – POST RETIREMENT BENEFIT PLAN

Effective July 1, 2013, the Corporation revised its retiree medical benefit plan for employees who were hired before March 27, 2007. Newly retiring employees will no longer be offered medical, dental or life insurance coverage. Instead, qualified retirees will receive a post retirement bonus. The Corporation will pay a post retirement bonus equal to $20,000 to employees (i) who were hired prior to March 20, 2007; (ii) who retire on or after July 1, 2013; (iii) who are at least age 59 ½ at the time of retirement; and (iv) who have at least twenty-five years of service to the Corporation as of retirement. The bonus will be paid in a lump sum cash payment (subject to applicable tax withholding requirements) within 60 days after the employee’s retirement, provided such retirement constitutes a “separation from service” under section 409A of the Internal Revenue Code. The Corporation still sponsors a defined benefit post-retirement health care plan for retirees who retired prior to July 1, 2007.  Under this plan, premiums paid by retirees and spouses depend on date of retirement, age and coverage election. 

            The Corporation funding policy is to make the minimal annual contribution that is required by applicable regulations, plus such amounts as the Corporation may determine to be appropriate from time to time.  The Corporation expects to contribute $145 to the plan in 2014.

            The following table provides further information about the plan:

	Post-Retirement Benefits
	2013		2012
Change in benefit obligation
Benefit obligation at beginning of year	$	7,421	$	4,572
Service cost	138		91
Interest cost	292		351
Plan participants’ contribution	77		(81)
Expected benefits paid	(343)		(128)
Actuarial (gain) loss	(5,220)		2,616
Amendments	(52)		-
Benefit obligation at end of year	$	2,313	$	7,421
Change in fair value of assets
Fair value of plans assets at beginning of year	$	-	$	-
Employer contribution	77		(209)
Plan participants' contributions	266		(105)
Benefits paid	(343)		(314)
Fair value of plan assets at end of year	$	-	$	-
Reconciliation of funded status to benefit costs recognized
Projected benefit obligation, end of year	$	(2,313)	$	(7,421)
Fair value of assets, end of year	-		-
Funded status, end of year	(2,313)		(7,421)
Unrecognized prior service cost	(52)		-
Unrecognized net loss/(gain)	(2,490)		2,920
Prepaid/(accrued) benefit cost	(4,855)		(4,501)

            Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:

	2013		2012
Unrecognized net actuarial gain/loss	$	2,490	$	2,920
Unrecognized prior service cost	52		-
	$	2,542	$	2,920

Amounts recognized in statement of financial position are as follows:

	2013		2012
Current Liability	$	183	$	266
Noncurrent liability	4,672		4,235
Total	$	4,855	$	4,501

            A reconciliation of other comprehensive income is as follows:

	Post-Retirement Benefits
	2013		2012		2011
Accumulated other comprehensive income beginning of year	$	2,920	$	305	$	(2,849)
Less: loss/(gain) recognized in current year	(190)		-		205
Plus: loss/(gain) incurred in current year	(136)		2,615		-
Plus: prior service cost established in current year	(52)		-		-
Other comprehensive income/(loss)	(378)		2,615		2,950
Ending balance (before tax effects)	$	2,542	$	2,920	$	305
	Post-Retirement Benefits
Components of net periodic benefit cost:	2013		2012		2011
Service cost	$	138	$	91	$	24
Interest cost	292		351		139
Recognized net actuarial (gain) loss	190		-		(205)
Net periodic benefit cost (income)	$	620	$	442	$	(42)

            The estimated net gain for the defined benefits postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $188.

	Post-Retirement Benefits
Weighted-average assumption used to determine benefit obligation:	2013	2012
Discount rate	5%	4%
Rate of compensation increase	NA	NA

	Post-Retirement Benefits
Weighted-average assumptions used to determine benefit costs:	2013	2012
Discount rate	4%	8%

The following table gives the Health Care Cost Trend, which is applied to gross charges, net claims and retiree paid premiums to reflect the Corporation’s past practice and stated ongoing intention to maintain relatively constant cost sharing between the Corporation and retirees:

Health care trend rate	2013	2012
Initial
Pre-65	11%	11%
Post-65	7.50%	8%
Ultimate (pre and post-65	5.00%	5%
Years to ultimate
Pre-65	6	6
Post-65	5	6

            The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, net of participant contributions:

FYE	Company Benefits
2014	$         183
2015	167
2016	178
2017	169
2018	191
2019-2025	935
	$      1,823

               Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage-Point Increase	1-Percentage-Point Decrease
Effect on total of service and interest cost	$     29	$  (16)
Effect on postretirement benefit obligation	212	(109)

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Corporation's investments' unrealized losses and fair value (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
US Government agencies
Fair Value		$ 68,979
Less than 12 months
Fair Value		68,979
Unrealized Losses		280
Total
Total Fair Value		68,979
Total Unrealized Losses		280
Less than 12 months
Fair Value	100,533
Unrealized Losses	7,330
12 months or Greater
Fair Value	4,539
Unrealized Losses	461
Total
Total Fair Value	105,072
Total Unrealized Losses	7,791
US Government sponsored agency mortgage backed securities
Fair Value		12,881
Less than 12 months
Fair Value		12,881
Unrealized Losses		55
Total
Total Fair Value		12,881
Total Unrealized Losses		55
Less than 12 months
Fair Value	144,134
Unrealized Losses	10,073
12 months or Greater
Fair Value	8,698
Unrealized Losses	576
Total
Total Fair Value	152,832
Total Unrealized Losses	10,649
States and political subdivisions
Less than 12 months
Fair Value	2,615
Unrealized Losses	140
Total
Total Fair Value	2,615
Total Unrealized Losses	140
Corporate bonds
Fair Value		1,719
Less than 12 months
Fair Value		1,719
Unrealized Losses		9
Total
Total Fair Value		1,719
Total Unrealized Losses		9
Less than 12 months
Fair Value	8,590
Unrealized Losses	121
12 months or Greater
Fair Value	582
Unrealized Losses	24
Total
Total Fair Value	9,172
Total Unrealized Losses	145
Total of securities
Fair Value		83,579
Less than 12 months
Fair Value		83,579
Unrealized Losses		344
12 months or Greater
Fair Value		0
Unrealized Losses		0
Total
Total Fair Value		83,579
Total Unrealized Losses		344
Less than 12 months
Fair Value	255,872
Unrealized Losses	17,664
12 months or Greater
Fair Value	13,819
Unrealized Losses	1,061
Total
Total Fair Value	269,691
Total Unrealized Losses	$ 18,725

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Schedule of Interim Financial Reporting Tables (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Interim Financial Reporting Tables (Tables):

Schedule of Interim Financial Reporting (Tables)

The following table presents unaudited quarterly interim financial information for the Corporation for the years ended December 31, 2013 and 2012:  

	First	Second	Third	Fourth
2013	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,223	$        9,523	$         9,328	$        9,287	$      37,361
Interest expense	834	751	679	643	2,907
Net interest income	8,389	8,772	8,649	8,644	34,454
Provision for possible loan losses, net	-	-	-	-	-
Noninterest income	3,329	2,620	2,509	2,658	11,116
Noninterest expenses	8,105	8,165	8,322	8,237	32,829
Income before income taxes	3,613	3,227	2,836	3,065	12,741
Income taxes	557	842	779	687	2,865
Net income	$        3,056	$        2,385	$         2,057	$        2,378	$        9,876
Basic earnings per share	0.59	0.46	0.40	0.47	1.93
Weighted average shares outstanding per quarter	5,178,759	5,133,051	5,086,469	5,046,833	5,110,849
	First	Second	Third	Fourth
2012	Quarter	Quarter	Quarter	Quarter	Total
Interest income	$        9,065	$        9,095	$         9,114	$        9,110	$      36,384
Interest expense	1,071	979	917	874	3,841
Net interest income	7,994	8,116	8,197	8,236	32,543
Provision for possible loan losses, net	600	520	-	-	1,120
Noninterest income	3,379	3,360	2,276	2,616	11,631
Noninterest expenses	7,754	8,424	8,145	9,207	33,530
Income before income taxes	3,019	2,532	2,328	1,645	9,524
Income taxes	690	451	373	402	1,916
Net income	$        2,329	$        2,081	$         1,955	$        1,243	$        7,608
Basic earnings per share	0.44	0.39	0.37	0.23	1.43
Weighted average shares outstanding per quarter	5,330,000	5,330,000	5,328,002	5,332,893	5,315,634

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Comprehensive Income (Loss)
Net Income for common shareholders	$ 9,876	$ 7,608	$ 6,996
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax (benefit) expenses of ($8,507), $1,204, and $2,960	(13,589)	1,923	4,728
Reclassification adjustment for realized gains included in net income, net of taxes of ($319), ($883), and ($561), respectively	(510)	(1,411)	(897)
Change in unfunded portion of postretirement benefit obligations, net of tax of ($146), $1,008 and $1,214, respectively	(232)	1,610	1,940
Other Comprehensive Income (Loss)	(14,331)	2,122	5,771
Total Comprehensive Income (Loss)	$ (4,455)	$ 9,730	$ 12,767

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ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT

12 Months Ended

Dec. 31, 2013

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") BY COMPONENT

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 December 31, 2013, 2012 and 2011, were as follows:

											Affected Line Item in the Statements of Income
	Amounts Reclassified from AOCI
	Years Ended
	December 31, 2013				December 31, 2012			December 31, 2011
Unrealized gains (losses) on available-for-sale securities	$	829			$	2,294		$	1,458		Realized gain (loss) on sale of securities
	(319)				(883)			(561)			Tax (expense) benefit
	$		510		$	1,411		$	897		Net reclassified amount
Amortization of defined benefit pension items
Actuarial gains (losses)	$		(190)		$	-		$	205
	73				-			(79)			Tax (expense) benefit
	$		(117)		$		-	$		126	Net reclassified amount
Total reclassifications out of AOCI	$			393	$		1,411	$	1,023

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Risk grades and classified loans by class Retail Loan Portfolio (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Consumer Loans
Performing		$ 11,610
Performing		11,610
Nonperforming*		11
TOTALS Retail Loan Portfolio		11,621
Performing	10,936
Nonperforming*	21
TOTALS Retail Loan Portfolio	10,957
Single Family Residential
Performing		192,808
Performing		192,808
Nonperforming*		3,541
TOTALS Retail Loan Portfolio		196,349
Performing	212,096
Nonperforming*	1,667
TOTALS Retail Loan Portfolio	213,763
All Other Retail Loans
Performing		23,131
Performing		23,131
Nonperforming*		133
TOTALS Retail Loan Portfolio		23,264
Performing	27,643
Nonperforming*	28
TOTALS Retail Loan Portfolio	27,671
Retail Loan Totals
Performing		227,549
Performing		227,549
Nonperforming*		3,685
TOTALS Retail Loan Portfolio		231,234
Performing	250,675
Nonperforming*	1,716
TOTALS Retail Loan Portfolio	$ 252,391

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POST RETIREMENT BENEFIT PLAN - Components of net periodic benefit cost (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Components of net periodic benefit cost
Service cost	$ 138	$ 91	$ 24
Interest cost	292	351	139
Recognized net actuarial (gain) loss	190		(205)
Net periodic pension cost	$ 620	$ 442	$ (42)

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Short-term borrowings included the following (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Short-term borrowings included the following
Securities sold under repurchase agreements	$ 18,095	$ 17,068
Outstanding advances Blanket Agreement for Advances and Security Agreement	0	10,100
The maximum amount of outstanding agreements at any month	22,359	22,598
The monthly average of outstanding agreements totaled in an amount	$ 19,052	$ 18,657

XML

ACCOUNTING POLICIES (POLICIES)

12 Months Ended

Dec. 31, 2013

Accounting Policies:

Accounting Policies

Accounting Policies

The accounting principles followed and the methods of applying those principles conform with accounting principles generally accepted in the United States (“GAAP”) and to general practices in the banking industry.  The significant accounting policies applicable to First Farmers and Merchants Corporation (the Corporation) are summarized as follows.

Nature of Operations

Nature of Operations

The Corporation is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, First Farmers and Merchants Bank (the Bank).  The Bank is primarily engaged in providing a full range of banking and financial services, including lending, investing of funds, obtaining deposits, trust and wealth management operations, and other financing activities to individual and corporate customers in the middle Tennessee area.  The Bank is subject to competition from other financial institutions.  The Corporation and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements present the accounts of the Corporation and its wholly-owned subsidiary, First Farmers and Merchants Bank.  The Bank has the following direct and indirect subsidiaries: F & M West, Inc., Maury Tenn, Inc., and Maury Tenn Properties, Inc.  Noncontrolling interests consist of preferred shares in Maury Tenn Properties, Inc. that are owned by third parties and Maury Tenn, Inc.  The preferred shares in Maury Tenn Properties, Inc. receive dividends, which are included in the consolidated statements of income.  Intercompany accounts and transactions have been eliminated in consolidation.

Certain items in prior financial statements have been reclassified to conform to the current presentation.  These reclassifications had no effect on net income.

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management of the Corporation and the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities.  Those estimates and assumptions also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan and lease losses, the fair value of financial instruments,  the valuation of foreclosed real estate, valuation of goodwill, valuation of deferred tax assets and the liability related to post-retirement benefits.

Concentrations of Credit Risk

Concentrations of Credit Risk

The Corporations’ banking activities include granting commercial, residential, and consumer loans to customers primarily located in central and south central Tennessee and Northern Alabama.  The Corporation is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions.  Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus allowance for loan losses and total capital are not exceeded.  At December 31, 2013 our concentrations of commercial real estate, rental and leasing loans were 119.6% of Tier 1 Capital plus the allowance for loan and lease losses, respectively.  Health care and social assistance loans were 46.3%.  Manufacturing and construction loans were 25.4%.  Wholesale trade credits were 25.2%.  These percentages are within our internally established limits regarding concentrations of credit.

 Loans secured by non-farm, non-residential real estate comprised 29.0% of the loan portfolio at December 31, 2013.  Management remains comfortable with the real estate exposure levels within the commercial loan portfolio.  Management believes the commercial real estate portion remains well diversified across several different property types and several different geographic markets, stretching primarily from Davidson County, Tennessee to northern Alabama.

Cash and Cash Equivalents

Cash and Due From Banks

Included in cash and due from banks are reserve amounts that are required to be maintained in the form of cash and balances due from the Federal Reserve Bank and other banks.  At December 31, 2013, the Bank’s required reserve was $2,560 at the Federal Reserve.  From time to time throughout the year, the Bank’s balances due from other financial institutions exceeded Federal Deposit Insurance Corporation (FDIC) insurance limits.  The Bank had one account over the limit at December 31, 2013 and it was $261.  Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. 

Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents include cash on hand, cash due from banks and federal funds sold.  Federal funds are sold for one-day periods. 

Securities

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Corporation does not intend to sell a debt security, and it is more likely than not the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.  For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income.  The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections. 

Loans

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased commercial loans are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments. 

Allowance for Loan and Lease Losses

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is established through provisions for loan and lease losses charged against income.  Loan losses are charged against the allowance when management determines that the uncollectibility of a loan has been confirmed.  Subsequent recoveries, if any, are credited to the allowance account in the period received.

The adequacy of the allowance for loan and lease losses is evaluated quarterly in conjunction with loan review reports and evaluations that are discussed in meetings with loan officers, credit administration and the Corporation’s Board of Directors.  The Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors are considered in this evaluation.  This process is inherently subjective as it requires material estimates that are susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.  The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan portfolio.

A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to the Corporation, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due. 

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 (4 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.

Loans Held-for-sale

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.  Gains and losses on loan sales are recorded in noninterest income.  The Corporation does not retain servicing rights on loans sold.  Loans held for sale at December 31, 2013 and 2012 totaled $327 and $2,456, respectively.

Other Real Estate

Other Real Estate

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

When foreclosed properties are acquired current appraisals are obtained on the properties.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected selling costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 24 months. 

Premises and Equipment

Premises and Equipment

            Premises and equipment are stated at cost, less accumulated depreciation and amortization.  The provision for depreciation is computed principally on an accelerated method over the estimated useful life of an asset, which ranges from 15 to 39 years for buildings and from three to 25 years for equipment.  Costs of major additions and improvements are capitalized.  Expenditures for maintenance and repairs are charged to operations as incurred.  Gains or losses from the disposition of property are reflected in operations, and the asset accounts and related allowances for depreciation are reduced.

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems.  The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.  At December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock totaled $3,879.

Goodwill

Goodwill

Goodwill is evaluated annually for impairment.  Quantitative and qualitative assessments are performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill.  If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.

Transfers of Financial Assets

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

Income Taxes

The Corporation files consolidated income tax returns with its subsidiaries.  The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Corporation determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.  Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.  With a few exceptions, the Corporation is no longer subject to U.S. federal tax examinations for years before 2010, and state and local tax examinations by tax authorities for years before 2010.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.

Securities Sold Under Agreements to Repurchase

Securities Sold Under Agreements to Repurchase

            Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date.  Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction

Fair Value Measurements

Fair Value Measurements

            FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements.  See Note 13 – Fair Value Measurement.  In general, fair values of financial instruments are based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as input, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

Shareholders' Equity and Earnings Per Share

Shareholders’ Equity and Earnings Per Share

Basic earnings per share represent income available to shareholders divided by the weighted average number of shares of Corporation common stock outstanding during the period.  Diluted earnings per share reflect additional shares of common stock that would have been outstanding if potentially dilutive shares of common stock had been issued, as well

as any adjustment to income that would result from the assumed conversion.  For the years ended December 31, 2013, 2012 and 2011, there were no potentially dilutive shares of common stock issuable.

In 2013, the Corporation adopted a plan to repurchase shares of its common stock.  The plan allowed the purchase of up to 200,000 shares.  The Corporation purchased 158,988 shares in 2013.  In 2012, the Corporation adopted a plan to repurchase up to 150,000 shares of common stock .  The Corporation repurchased 150,000 shares in 2012.  For 2011, the Corporation adopted a similar plan allowing it to repurchase up to 100,000 shares of common stock.  The Corporation repurchased 100,000 shares in 2011.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income tax expenses or benefits.  Other comprehensive (loss) income includes unrealized appreciation or depreciation on available-for-sale securities and changes in the net actuarial gain or loss of the postretirement benefit obligation.

The components of accumulated other comprehensive income (loss), included in shareholder’s equity, are as follows as of December 31, 2013, 2012 and 2011:

	Years Ended December 31,
	2013		2012		2011
Net unrealized gains (losses)
on available-for-sale securities	$	(17,178)	$	5,747	$	4,914
Net actuarial gain on unfunded portion
of postretirement benefit obligation	2,542		2,920		302
	(14,636)		8,667		5,216
Tax effect - (expense) benefit	5,635		(3,337)		(2,008)
Other comprehensive income (loss)	$	(9,001)	$	5,330	$	3,208

Transfer Between Fair Value Hierarchy Levels

Transfers Between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period end date.

Segment Reporting

Segment Reporting

Management analyzes the operations of the Corporation assuming one operating segment, community lending services.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Corporation on January 1, 2013 and did not have a significant impact on the Corporation’s financial statements. See Note 2 – Other Comprehensive Income (Loss).

ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax loss, or a Tax Credit Carryforward Exists (Topic 740-10) – a consensus of the FASB Emerging Issues Task Force.”  ASU 2013-11 provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists.  The objective is to eliminate diversity in practice resulting from a lack of guidance on this topic.  ASU 2013-11 will be effective for the Corporation after December 15, 2013 and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2013-12, “Definition of a Public Business Entity – An Addition to the Master Glossary” amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP.  The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to business entities.  The amendment does not affect existing requirements, but instead improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance.  There is no actual effective date for the amendment in this Update.  However, the term public business entity will be used beginning with ASU 2014-01.  ASU 2013-12 is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” clarifies when an in substance repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The new update requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  The update 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.

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Fair values of the Corporation's financial instruments (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Carrying Amount
Cash and due from banks		$ 23,443
Cash and due from banks		23,443
Interest-bearing deposits in other banks		31,953
Federal funds sold		15,000
Federal Home Loan Bank and Federal Reserve Bank stock		3,879
Securities available-for-sale		345,718
Securities held-to-maturity		31,755
Loans held for sale		2,456
Loans, net		558,350
Accrued interest receivable		4,060
Non-interest bearing deposits		169,136
Interest bearing deposits		763,713
Repurchase agreements		17,068
Advances from Federal Home Loan Bank		10,100
Accrued interest payable		754
Commitments to extend credit and letters of credit		0
Cash and due from banks	20,391
Interest-bearing deposits in other banks	25,167
Federal funds sold	9,850
Federal Home Loan Bank and Federal Reserve Bank stock	3,879
Securities available-for-sale	329,714
Securities held-to-maturity	27,839
Loans held for sale	327
Loans, net	598,171
Accrued interest receivable	4,183
Non-interest bearing deposits	179,823
Interest bearing deposits	777,514
Repurchase agreements	18,095
Accrued interest payable	663
Commitments to extend credit and letters of credit	0
Quoted Prices in Active Markets for Identical Assets (Level 1)
Cash and due from banks		23,443
Cash and due from banks		23,443
Interest-bearing deposits in other banks		31,953
Federal funds sold		15,000
Loans held for sale		2,456
Non-interest bearing deposits		169,136
Cash and due from banks	20,391
Interest-bearing deposits in other banks	25,167
Federal funds sold	9,850
Loans held for sale	327
Non-interest bearing deposits	179,823
Significant Other Observable Inputs (Level 2)
Federal Home Loan Bank and Federal Reserve Bank stock		3,879
Securities available-for-sale		345,718
Securities held-to-maturity		33,420
Accrued interest receivable		4,060
Interest bearing deposits		766,043
Repurchase agreements		17,068
Advances from Federal Home Loan Bank		10,215
Accrued interest payable		754
Federal Home Loan Bank and Federal Reserve Bank stock	3,879
Securities available-for-sale	329,714
Securities held-to-maturity	28,595
Accrued interest receivable	4,183
Interest bearing deposits	778,682
Repurchase agreements	18,095
Accrued interest payable	663
Significant Unobservable Inputs (Level 3)
Loans, net		572,277
Loans, net	$ 607,113

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Schedule of Short-term Borrowings (Tables)

12 Months Ended

Dec. 31, 2013

Schedule of Short-term Borrowings (Tables):

Schedule of Shor-term Borrowings (Tables)

Short-term borrowings included the following at December 31:

	2013	2012
Securities sold under repurchase agreements	$       18,095	$       17,068

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REGULATORY MATTERS

12 Months Ended

Dec. 31, 2013

REGULATORY MATTERS:

REGULATORY MATTERS

NOTE 12 – REGULATORY MATTERS

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

            Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Capital and Tier I Capital to risk-weighted assets and of Tier I Capital to average assets.  Actual capital amounts and ratios are presented in the table below (dollars in thousands).  Management believes, as of December 31, 2013, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.

				For Minimum Capital			For Minimum Regulatory
(Dollars in Thousands)	Actual			Adequacy Purposes			Compliance Purposes
As of December 31, 2013	Amount		Ratio	Amount		Ratio > or =	Amount		Ratio > or =
Total Capital (to Risk Weighted
Assets)   Consolidated	$	110,276	15.3 %	$	57,632	8.0 %	$	-	-
Bank	107,392		15.0 %	57,248		8.0 %	71,560		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	101,681		14.1 %	28,816		4.0 %	-		-
Bank	98,797		13.8 %	28,624		4.0 %	42,936		6.0%
Tier I Capital (to Average
Assets)   Consolidated	101,681		9.4 %	43,358		4.0 %	-		-
Bank	98,797		9.1 %	43,358		4.0 %	54,198		5.0%
As of December 31, 2012
Total Capital (to Risk Weighted
Assets)   Consolidated	$	109,011	15.8 %	$	55,265	8.0 %	$	-	-
Bank	106,075		15.5 %	54,890		8.0 %	68,613		10.0%
Tier I Capital (to Risk Weighted
Assets)   Consolidated	100,338		14.5 %	27,603		4.0 %	-		-
Bank	97,402		14.2 %	27,418		4.0 %	41,127		6.0%
Tier I Capital (to Average
Assets)   Consolidated	100,338		9.7 %	41,505		4.0 %	-		-
Bank	97,402		9.4 %	41,492		4.0 %	51,865		5.0%

The Corporation is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At December 31, 2013, approximately $15,022 of retained earnings were available for dividend declaration without prior approval.