FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS****FORWARD-LOOKING STATEMENTS

*Certain statements contained in this report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "pro forma" or "anticipates," or the negatives of such terms.  We caution you not to place undue reliance on such forward-looking statements in this report because results could differ materially from those anticipated due to a variety of factors.  These factors include, but are not limited to, 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; 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, 2003, the  only subsidiary of the Corporation was First Farmers and Merchants National Bank (the Bank) which conducts the principal business of the consolidated company.  The Bank is a national banking association which was organized in 1954 as a successor to a state bank organized in 1909.  The principal executive offices of the Corporation are located at 816 South Garden Street, Columbia, Maury County, Tennessee.   The financial condition of the Corporation should be evaluated in terms of the Bank's operations within its service area.  All dollar amounts in this report, other than per-share amounts and percentages, 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 constantly changing  interest rate environment.  Bank customers are enjoying the quality service of a community bank and the safety and strength of a regional bank.  

     At December 31, 2003, the Corporation's consolidated total assets were $828,813, its consolidated net loans were $414,381, its total deposits were $716,433, and its total shareholders' equity was $102,285.  During 

2003, the Bank experienced a decline in loan demand as a result of a slow local economy evidenced by the closing of manufacturing plants, Bank credit quality initiatives, and significant mortgage loan refinancing activity in the low interest rate environment.  Total deposits were down as well as the Bank decreased its reliance on short term large dollar certificates of deposit.  Total shareholders' equity was up 2.6%.
**Results of Operations

     Consolidated net income in 2003 was up .38% compared to 2002.  Net interest income was down 9.4% as financial products repriced in the low rate environment and loan demand declined.  Credit quality initiatives in 2003 and the change in the accounting estimate of the provision for loan losses during the first quarter of 2002 were behind lower provisions for the allowance in 2003.  Net income was $8,550 for 2003 compared to $8,518 in 2002 and $10,613 in 2001.  On a per common share basis, net income was $2.93 for 2003 versus $2.92 for 2002 and $3.63 for 2001.

     The accompanying tables and the discussion and financial information are presented to aid in understanding the Corporation's current financial position and results of operations.  The emphasis of this discussion will be on the years 2003, 2002, and 2001; however, financial information for prior years will also be presented where appropriate.  This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this report.
**FINANCIAL CONDITION**
     First Farmers and Merchants Corporation's financial condition depends on the quality and nature of its assets, its liability and capital structure, the market and economic conditions, and the quality of its personnel.
**Net Interest Margin

     The net interest margin is defined as the difference between the revenue from earning assets, primarily interest income, and interest expense related to interest-
**FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF**OPERATIONS****Net Interest Margin**(Continued)**
bearing liabilities.  The maintenance of the net interest margin at a level which, when coupled with noninterest revenues, exceeds additions to the allowance for loan losses, noninterest expenses and income taxes, and yields an acceptable profit is critical for success in the banking industry.  The 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.**TABLE A -Distribution of Assets, Liabilities, and Shareholders' Equity, Interest Rates       and Interest Differential
**YEAR ENDED DECEMBER 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 **2003
2002
2001
 ** ** ** ** ** ** ** 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 **Average**Rate/
Average
Rate/
Average
Rate/**Balance**Yield**Interest
Balance
Yield
Interest
Balance
Yield
Interest
ASSETS
 (Dollars In Thousands)
Interest earning assets
        Loans, net**$**444,942**6.46**%**$**28,735***
$
513,553
7.28
%
$
37,411***
$
462,725
8.49
%
$
39,272***
        Bank deposits**295**1.69**5
273
2.56
7
625
6.56
41
        Taxable securities**259,171**4.33**11,223
210,974
5.49
11,578
172,929
6.10
10,556
        Tax exempt
           securities**54,837**7.51**4,117***
65,173
6.57
4,283***
69,876
6.34
4,430***
        Federal funds sold**22,922**1.04**239
18,476
1.58
292
8,238
3.87
319** ** 
 
 
 
 
       TOTAL
        EARNING
ASSETS**782,167**5.67**$**44,319
808,449
6.63
$
53,571
714,393
7.64
$
54,618
Noninterest earning ** 
 
 
    Assets
        Cash and due from
             banks**28,099
28,946
24,509
        Bank premises and
           equipment**12,913
12,781
9,762
        Other assets**43,921
40,349
30,141** 
 
 
       TOTAL ASSETS**$**867,100
$
890,525
$
778,805
 LIABILITIES AND
 ** ** ** ** 
 ** ** 
 
 
 
 
 
 
 ** 
 
 
 
 
 
 
 
    SHAREHOLDERS'
       EQUITY
Interest bearing 
     liabilities
   Time and savings:
        deposits
    NOW and money
        market accounts **$**261,387**0.91**%**$**2,390
$
255,861
1.69
%
$
4,332
$
195,476
2.13
%
$
4,154
     Savings**108,799**1.19**1,295
102,735
2.11
2,165
64,687
2.76
1,783
     Time**197,759**2.65**5,235
222,206
3.46
7,698
231,370
5.50
12,724
     Time  over
         $100,000**80,227**3.08**2,468
97,182
3.68
3,572
92,450
5.49
5,077
     TOTAL INTEREST** ** 
 
 
 
 
         BEARING  
           DEPOSITS**648,172**1.76**11,388
677,984
2.62
17,767
583,983
4.06
23,738
      Federal funds 
        purchased and**********************************************************************************************************************************************************************************