UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

** **

**FORM 10-Q**

(Mark one)

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

For the quarterly periodended **March 31, 2006**

or

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

For the transition periodfrom _______________ to _______________________

Commission file numbers 0-10972

First Farmers and MerchantsCorporation

(Exact name of registrant as specified in its charter)

            Tennessee                                                                                                          62-1148660

(State or other jurisdiction of incorporation ororganization)                                       (I.R.S.Employer Identification No.)

                816 South Garden Street

                Columbia, Tennessee                                                                                                  38402-1148

    (Address of principalexecutive offices)                                                                                      (ZipCode)

931-388-3145

(Registrant's telephone number, including area code)

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

              

                Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   [X]Yes           [  ] No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.  See definition of"accelerated filer and large accelerated filer" in Rule 12b-2 of theExchange Act.  (Check one):  

Largeaccelerated filer [ ]     Accelerated filer [X]            Non-acceleratedfiler [ ]       

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

Indicate the number of shares outstanding of each ofthe registrant's classes of common stock, as of the latest practicable date. 5,840,000shares as of May 5, 2006 

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**PART I - FINANCIAL INFORMATIO**N

**Item 1. FinancialStatements.**

Thefollowing unaudited consolidated financial statements of the Registrant and itssubsidiary are included in this Report:

Consolidatedbalance sheets - March 31, 2006 and December 31, 2005.

Consolidatedstatements of income - For the three months ended March 31, 2006 and March 31,2005.

Consolidatedstatements of cash flows - For the threemonths ended March 31, 2006 and March 31,2005.

Selectednotes to consolidated financial statements.

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| **FIRST FARMERS AND MERCHANTS CORPORATION AND  SUBSIDIARY**                                                           |
|-----------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS**                                                                                       |
|                                                                                                                       |  | **March 31,** | December 31, |
|                                                                                                                       | *(Dollars in Thousands, Except Per Share Data)* | **2006** | 2005 |
|                                                                                                                       |  | (Unaudited) |                  (1) |
| **ASSETS**                                                                                                            | Cash and due from banks | ** $** | **23,965 ** |  $ | 28,489  |
|                                                                                                                       | Interest-bearing deposits in banks | **50 ** | 49  |
|                                                                                                                       |               Total cash and cash equivalents | **24,015 ** | 28,538  |
|                                                                                                                       | Securities | ** ** |  |
|                                                                                                                       |     Available for sale (amortized cost $188,353 | ** ** |  |
|                                                                                                                       |          and $195,448, respectively) | **184,542 ** | 191,931  |
|                                                                                                                       |     Held to maturity (fair value $89,454 | ** ** |  |
|                                                                                                                       |          and $90,810, respectively) | **88,547 ** | 89,832  |
|                                                                                                                       |               Total securities | **273,089 ** | 281,763  |
|                                                                                                                       | Loans, net of deferred fees | **472,419 ** | 459,897  |
|                                                                                                                       |     Allowance for possible loan losses | **(7,730)** | (7,794) |
|                                                                                                                       |               Net loans | **464,689 ** | 452,103  |
|                                                                                                                       | Bank premises and equipment, at cost | ** ** |  |
|                                                                                                                       |          less allowance for depreciation | **11,754 ** | 11,909  |
|                                                                                                                       | Core deposit and other intangibles | **10,666 ** | 10,930  |
|                                                                                                                       | Other assets | **26,332 ** | 25,796  |
|                                                                                                                       |             TOTAL ASSETS | ** $** | **810,545 ** |  $ | 811,039  |
| **LIABILITIES**                                                                                                       | Deposits | ** ** |  |
|                                                                                                                       |      Noninterest-bearing | ** $** | **121,153 ** |  $ | 117,065  |
|                                                                                                                       |      Interest-bearing (including certificates of  deposit | ** ** |  |
|                                                                                                                       |           over $100,000:  2006 - $100,148; 2005 -  $94,471) | **572,480 ** | 566,523  |
|                                                                                                                       |             Total deposits | **693,633 ** | 683,588  |
|                                                                                                                       | Federal funds purchased and securities sold | ** ** |  |
|                                                                                                                       |            under agreements to repurchase | **2,767 ** | 13,132  |
|                                                                                                                       | Dividends payable | **- ** | 1,869  |
|                                                                                                                       | Other short term liabilities | **60 ** | 522  |
|                                                                                                                       | Accounts payable and accrued liabilities | **6,111 ** | 5,417  |
|                                                                                                                       |             TOTAL LIABILITIES | **702,571 ** | 704,528  |
| **SHAREHOLDERS'**                                                                                                     | Common stock - $10 par value, per share, 8,000,000  shares | ** ** |  |
| **EQUITY**                                                                                                            |         authorized;  issued and outstanding -  5,840,000 | **58,400 ** | 58,400  |
|                                                                                                                       | Additional paid-in capital | **4,320 ** | 4,320  |
|                                                                                                                       | Retained earnings | **47,598 ** | 45,954  |
|                                                                                                                       | Accumulated other comprehensive income | **(2,344)** | (2,163) |
|                                                                                                                       |             TOTAL SHAREHOLDERS' EQUITY | **107,974 ** | 106,511  |
|                                                                                                                       |  | ** ** |  |
|                                                                                                                       |             TOTAL LIABILITIES AND | ** ** |  |
|                                                                                                                       |                 SHAREHOLDERS' EQUITY | ** $** | **810,545 ** |  $ | 811,039  |
|       (1)  Derived from audited financial  statements.                                  |  |  |
|       The accompanying notes are an integral part of  the consolidated financial statements. |  |

| **FIRST FARMERS AND	MERCHANTS CORPORATION AND SUBSIDIARY**                                                            |
|-----------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF INCOME**                                                                                 |
|                                                                                                                       | *(Unaudited)* |  |  |
|                                                                                                                       | *(Dollars In Thousands, Except Per Share Data)* |  |  |
|                                                                                                                       | *Three Months Ended March 31,* | **2006** | 2005 |
|                                                                                                                       |  | ** ** |  |
| **INTEREST INCOME**                                                                                                   | Interest and fees on loans | ** $** | **7,268 ** |  $ | 6,368  |
|                                                                                                                       | Income on investment securities | ** ** |  |
|                                                                                                                       |      Taxable interest | **1,634 ** | 2,287  |
|                                                                                                                       |      Exempt from federal income tax | **1,079 ** | 669  |
|                                                                                                                       |      Dividends | **49 ** | 34  |
|                                                                                                                       |  | **2,762 ** | 2,990  |
|                                                                                                                       | Other interest income | **34 ** | 36  |
|                                                                                                                       |     TOTAL INTEREST INCOME | **10,064 ** | 9,394  |
| **INTEREST EXPENSE**                                                                                                  | Interest on deposits | **2,988 ** | 2,150  |
|                                                                                                                       | Interest on other short-term borrowings | **77 ** | 39  |
|                                                                                                                       |       TOTAL INTEREST EXPENSE | **3,065 ** | 2,189  |
|                                                                                                                       |  | ** ** |  |
|                                                                                                                       |             NET INTEREST INCOME | **6,999 ** | 7,205  |
|                                                                                                                       | PROVISION FOR POSSIBLE LOAN LOSSES | ** ** |  |
|                                                                                                                       |      (RECOVERIES) NET | **- ** | (796) |
|                                                                                                                       |  | ** ** |  |
|                                                                                                                       |       NET INTEREST INCOME AFTER | ** ** |  |
|                                                                                                                       |            PROVISION FOR LOAN LOSSES | ** ** |  |
|                                                                                                                       |               (RECOVERIES) | **6,999 ** | 8,001  |
| **NONINTEREST  INCOME**                                                                                          | Trust department income | **540 ** | 588  |
|                                                                                                                       | Service fees on deposit accounts | **1,815 ** | 1,590  |
|                                                                                                                       | Other service fees, commissions and fees | **87 ** | 93  |
|                                                                                                                       | Other operating income | **184 ** | 187  |
|                                                                                                                       |       TOTAL NONINTEREST  INCOME | **2,626 ** | 2,458  |
| **NONINTEREST  EXPENSES**                                                                                        | Salaries and employee benefits | **4,135 ** | 4,023  |
|                                                                                                                       | Net occupancy expense | **562 ** | 603  |
|                                                                                                                       | Furniture and equipment expense | **297 ** | 293  |
|                                                                                                                       | Other operating expenses | **2,711 ** | 2,588  |
|                                                                                                                       |       TOTAL NONINTEREST EXPENSES | **7,705 ** | 7,507  |
|                                                                                                                       |            INCOME BEFORE PROVISION FOR | ** ** |  |
|                                                                                                                       |                  INCOME TAXES | **1,920 ** | 2,952  |
|                                                                                                                       | PROVISION FOR INCOME TAXES | **276 ** | 868  |
|                                                                                                                       |                   NET INCOME | ** $** | **1,644 ** |  $ | 2,084  |
| **BASIC EARNINGS PER**                                                                                                |  |  |  |
| **SHARE**                                                                                                             | Common stock |  |  |
|                                                                                                                       |                  (Shares Outstanding: 5,840,000) | ** $** | **0.28 ** |  $ | 0.36  |
|       The accompanying notes are an integral part of  the consolidated financial statements. |  |  |

| **FIRST FARMERS AND MERCHANTS CORPORATION AND  SUBSIDIARY                ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASH  FLOWS                 **            |
|                                                                                                                                                             | *(Unaudited)* |  |  |
|                                                                                                                                                             | *(Dollars In Thousands, Except Per Share Data)* |  |  |
|                                                                                                                                                             | *Three Months Ended  March 31,* | **2006** | 2005 |
| **OPERATING**                                                                                                                                               | Net income | ** $** | **1,644 ** |  $ | 2,084  |
| **ACTIVITIES**                                                                                                                                              |    Adjustments to reconcile net income to net cash  provided | ** ** |  |
|                                                                                                                                                             |      by operating activities | ** ** |  |
|                                                                                                                                                             |        Deficiency of provision for possible loan  losses | ** ** |  |
|                                                                                                                                                             |           over net charge offs | **(64)** | (467) |
|                                                                                                                                                             |        Provision for depreciation and amortization  of | ** ** |  |
|                                                                                                                                                             |           premises and equipment | **274 ** | 317  |
|                                                                                                                                                             |        Amortization of deposit base intangibles | **264 ** | 264  |
|                                                                                                                                                             |        Amortization of investment security premiums, | ** ** |  |
|                                                                                                                                                             |           net of accretion of discounts | **355 ** | 621  |
|                                                                                                                                                             |        Decrease in cash surrender value of life  insurance contracts | **(90)** | (23) |
|                                                                                                                                                             |        (Increase) decrease in | ** ** |  |
|                                                                                                                                                             |           Deferred income taxes | **(1)** | 207  |
|                                                                                                                                                             |           Interest receivable | **(40)** | (28) |
|                                                                                                                                                             |           Other assets | **(292)** | 202  |
|                                                                                                                                                             |        Increase in | ** ** |  |
|                                                                                                                                                             |           Interest payable | **399 ** | 310  |
|                                                                                                                                                             |           Other liabilities | **295 ** | 145  |
|                                                                                                                                                             |                Total adjustments | **1,100 ** | 1,548  |
|                                                                                                                                                             |                Net cash provided by operating  activities | **2,744 ** | 3,632  |
| **INVESTING**                                                                                                                                               | Proceeds from maturities, calls and sales of | ** ** |  |
| **ACTIVITIES**                                                                                                                                              |       available-for-sale securities | **24,045 ** | 13,558  |
|                                                                                                                                                             | Proceeds from maturities and calls of held-to-maturity  securities | **1,260 ** | 645  |
|                                                                                                                                                             | Purchases of investment securities | ** ** |  |
|                                                                                                                                                             |       Available-for-sale | **(17,280)** | (9,079) |
|                                                                                                                                                             |       Held-to-maturity | **- ** | (3,885) |
|                                                                                                                                                             | Net decrease (increase) in loans | **(12,522)** | 6,721  |
|                                                                                                                                                             | Purchases of premises and equipment | **(119)** | (290) |
|                                                                                                                                                             |                Net cash (used in) provided by  investing activities | **(4,616)** | 7,670  |
| **FINANCING**                                                                                                                                               | Net increase in noninterest-bearing | ** ** |  |
| **ACTIVITIES**                                                                                                                                              |       and interest-bearing deposits | **10,045 ** | 12,579  |
|                                                                                                                                                             | Net decrease in short-term borrowings | **(10,827)** | (3,930) |
|                                                                                                                                                             | Cash dividends | **(1,869)** | (1,752) |
|                                                                                                                                                             |                Net cash (used in) provided by  financing activities | **(2,651)** | 6,897  |
|                                                                                                                                                             | Decrease (increase) in cash and cash equivalents | **(4,523)** | 18,199  |
|                                                                                                                                                             | Cash and cash equivalents at beginning of period | **28,538 ** | 22,251  |
|                                                                                                                                                             | Cash and cash equivalents at end of period | ** $** | **24,015 ** |  $ | 40,450  |
|       The accompanying notes are an integral part of  the consolidated financial statements.                                       |  |  |

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1- OTHER INFORMATION**

The unaudited consolidated financial statements have beenprepared on a consistent basis and in accordance with the instructions to Form10-Q and do not include all of the information and notes required by generallyaccepted accounting principles for complete financial statements.  In theopinion of management, all adjustments considered necessary for a fairpresentation have been included.  These adjustments were of a normal, recurringnature and consistent with generally accepted accounting principles.  For furtherinformation, refer to the consolidated financial statements and notes includedin the annual report of First Farmers and Merchants Corporation (the"Corporation") on Form 10-K for the year ended December 31, 2005.

**Note 2 - SUBSIDIARY CHARTER**

** **

            TheCorporation's subsidiary bank (the "Bank") received regulatory approval to convertits national charter to a state charter, which conversion became effective asof July 5, 2005.  On that date, the Bank converted to a Tennesseestate-chartered bank and its name changed from First Farmers and MerchantsNational Bank to First Farmers and Merchants Bank.

**NOTE 3- BRANCH CONSOLIDATIONS AND CLOSINGS**

            OnMarch 21, 2006, management made the decision to consolidate and/or close fourbranches of the Bank throughout three counties.  In Marshall County, the Lewisburg East office and Lewisburg Downtown offices are consolidating to theEllington office on May 1, 2006. In Giles County, the Pulaski West College office will be permanently closed and its operations transferred to the MartinHouse office on July 3, 2006.  In Lawrence County, the Leoma office will be permanentlyclosed on July 3, 2006. 

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**Item 2.  Management'sDiscussion and Analysis of Financial Condition and Results of Operations.**

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**FORWARD-LOOKING STATEMENTS**

    Certain statements contained in this report may not be based on historicalfacts and are "forward-looking statements" within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statementsmay be identified by, among other things, the use of forward-lookingterminology such as "anticipates," "could," "expects," "believes,""may" or "will," or future or conditional verb tenses, andvariations or  negatives of such terms.  These forward-looking statementsinclude, without limitation, those relating to the potential sale ofavailable-for-sale securities, repayment of loans by borrowers, migration ofloans to more severe classifications, failure to meet and satisfaction ofcapital adequacy requirements, adequacy of capital resources to meet liquidityneeds, material capital expenditures, the effect of fluctuating interest rates,deferred income tax assets and rate risk analysis.  We caution you not to placeundue reliance on such forward-looking statements in this report becauseresults could differ materially from those anticipated due to a variety offactors.  These factors include, but are not limited to, changes in economic conditions;fluctuations in prevailing interest rates and the effectiveness of our riskmonitoring systems; the ability of our borrowers to repay loans; adversechanges in our special mention credits; our ability to sell available-for-salesecurities to fund increased loan demand; our ability to meet regulatorycapital adequacy requirements; our ability to meet liquidity needs fromoperating activities; the accuracy of assumptions in our rate risk analysis;our ability to recognize deferred tax assets; our ability to maintain creditquality; our ability to provide market competitive products and services; lawsand regulations affecting financial institutions in general; our ability tocontrol factors influencing net interest income; the geographic concentrationof our assets; our ability to maintain sufficient asset quality and costcontrols; and other factors generally understood to affect the financialresults of financial services companies and other factors detailed from time totime in First Farmers and Merchants Corporation's filings with the Securitiesand Exchange Commission. We undertake no obligation to update theseforward-looking statements to reflect events or circumstances that occur afterthe date of this report.

**EXECUTIVE OVERVIEW**

AtMarch31, 2006, the consolidated total assets of First Farmers and MerchantsCorporation (the "Corporation") were $810.55 million, its consolidated netloans were $464.69 million, its total deposits were $693.63 million and itstotal shareholders' equity was $107.97 million.  The loan portfolio at March 31, 2006 increased$12.52 million, or 2.7%, compared to December 31, 2005.  The retail portion ofthe portfolio experienced a 1.0% increase during the first three months of 2006and the commercial portfolio increased 1.7% during the same period.  Totaldeposits increased $10.05 million or 1.5%, and shareholders' equity increased 1.4% duringthe first three months of 2006.  Total shareholders' equity includes anunrealized loss on available-for-sale securities of $2.34 million.

**MATERIALChanges in Financial Condition**

Averageearning assets at March 31, 2006 were down 1.1% or $8.4 million from averageearning assets at December 31, 2005.  Average overnight investments at March 31, 2006 weredown $4.0 million compared to December 31, 2005. Average investment securities at March 31, 2006 were down 6.5% compared to the average atDecember 31, 2005.  Average total assets of $807 million at March 31, 2006 decreased1.2% or $10.2 million, compared to an average of $818 million at December 31,2005.

**Securities**

Available-for-salesecurities are an integral part of the asset/liability management process for FirstFarmers and Merchants Bank, the Corporation's sole subsidiary (the "Bank"). Accordingly, they represent an important source of liquidity available to fundloans and accommodate asset reallocation strategies dictated by changes in the Bank'soperating and tax plans, shifting yield spread relationships, and changes inconfiguration of the yield curve.  At March 31, 2006, the Bank's investment securities portfoliohad $184.5 million available-for-sale securities and $88.5 million held-to-maturity securities compared to $191.9million and $89.8 million, respectively, at December 31, 2005.  The 3.9% decreasein available-for-sale securities for the three months ended March 31, 2006 resultedfrom investing in the loan portfolio or held-to-maturity securities fundsreceived as securities matured.  The Bank may sell available-for-salesecurities to fund planned increased loan demand as needed.  

**Loans**

Theloan portfolio is the largest component of earning assets for the Bank and, consequently, provides the highest amount ofrevenues for the Corporation.  The loan portfolio also contains the highest exposure to risk as a result ofthe possibility of unexpected deterioration in the credit quality ofborrowers.  When analyzing potential loans, management assesses both interestrate objectives and credit quality objectives in determining whether to make agiven loan and the appropriate pricing for that loan.  Concentrations withinthe Bank's loan portfolio exist.  First mortgage loans, secured by one-to-fourfamily residential properties, represented 36.9% of the total loan portfolio atMarch31, 2006.  The Bank recognizes this concentration, but finds the riskacceptable given the quality of underwriting and low level of historical lossexperience.  Mortgage loans secured by commercial properties have a higherlevel of risk and historical loss experience than residential mortgage loansand comprised 39.3% of the portfolio at March 31, 2006 .  There is not an industry concentration asmeasured by regulatory guidelines.  However, the Bank currently has heavy exposurein four broad industry categories, which include construction, real estaterenting and leasing, other services (churches) and public administration. These industries are monitored closely to ensure that underwriting practices,policies and loss allowance levels match the level of risk posed.  All loansare expected to be repaid from cash flow or proceeds from the sale of selectedassets of the borrowers.  Collateral requirements for the loan portfolio arebased on credit evaluation of the loan customers.

Theanalysis and review of asset quality by the Bank's credit administrationincludes a formal review that evaluates the adequacy of the allowance forpossible loan losses.  This review is updated monthly and evaluated morecompletely quarterly in conjunction with loan review reports and evaluationsthat are discussed in meetings with loan officers, credit administration and theBank's Board of Directors.  The allowance forpossible loan and lease losses was $7.7 million, or 1.6% of gross loans, at March 31, 2006,compared to $7.8 million, or 1.7%, at December31, 2005.  Net recoveries through March 31, 2006 were $64,000, which results in an annualizednet charge-off ratio of 0.05%.

Aformal process is in place to provide control over underwriting of loans andmonitor loan collectibility.  This process includes education and training ofpersonnel on the Bank's loan policies and procedures, credit analysts tosupport lenders, timely identification of loans with adverse characteristics, controlof corrective actions and objective monitoring of loan reviews.  A SpecialAssets Department of the Bank identifies and monitors assets that needattention.  At March 31, 2006, this process identified loans totaling $4.8million, or 1.0% of the portfolio, that were classified as other assetsespecially mentioned, compared to loans totaling $5.7 million, 1.25 % of theportfolio, so classified at December 31, 2005.  Loans totaling $9.4 million, or2.0% of the portfolio, were classified as substandard at March 31, 2006,compared to loans totaling $10.0 million, or 2.2% ofthe portfolio, so classified at December 31, 2005.  No loans were classified asdoubtful at March 31, 2006 and December 31, 2005. 

**Deposits**

            The Bank doesnot have any foreign offices and all deposits are serviced in its 22 domesticoffices.  The Bank's average deposits declined 1.7% during the first threemonths of 2006 compared to a decline of 1.9% in the first three months of 2005. The primary reason for the slowed decline of average deposits between theseperiods is that the Bank changed its strategy for pricing six month certificatesof deposit.  The decline slowed because of a re-focused effort on customerdeposits.  Average total noninterest-bearing deposits were 16.2% of totaldeposits at March 31, 2006, contributing to the Bank's low cost ofdeposits.  This compares to 16.5% at December 31, 2005.

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**RegulatoryRequirements for Capital**

TheCorporation and the Bank are subject to federal regulatory risk-adjustedcapital adequacy standards.  Failure to meet capital adequacy requirementscould result in certain mandatory, and possibly additional discretionary,actions by regulators that could have a direct material effect on theconsolidated financial statements of the Corporation and the Bank.  Theregulations require the Bank to meet specific capital adequacy guidelines thatinvolve quantitative measures of assets, liabilities and certainoff-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by theregulators about components, risk weightings and other factors.

            Quantitativemeasures established by the Board of Governors of the Federal Reserve System toensure capital adequacy require the Corporation and the Bank to maintainminimum amounts and ratios of Tier 1 Capital and Total Capital (Tier 1 plusTier 2 Capital) to risk-weighted assets and of Tier 1 Capital to average total assets(leverage capital ratio).   Equity capital (net of certain adjustments forintangible assets and investments in non-consolidated subsidiaries and certainclasses of preferred stock) is considered Tier 1 Capital.  Tier 2 Capitalconsists of core capital plus subordinated debt, some types of preferred stock,and a defined percentage of the allowance for possible loan losses.  To be"well-capitalized" under federal bank regulations, a bank holding company musthave a Tier 1 Capital ratio of at least 6%, a Total Capital ratio of at least 10%,and a leverage capital ratio of at least 5%.  As of March 31, 2006, the Corporation's Tier 1, Total Capital andleverage capital ratios were 19.1%, 20.3% and 12.5%, respectively.  The ratioswere 18.7%, 20.0% and 12.1%, respectively, at December 31, 2005.  As of March 31, 2006,the Bank's Tier 1 Capital, Total Capital and leverage capital were 18.9%, 20.2%,and 12.3%, respectively, compared to 18.5%, 19.8%, and 12.0% at December 31,2005. Management believes, as of March 31, 2006, that the Corporation and the Bank each metall capital adequacy requirements to which they are subject.

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**Liquidity and Capital****Resources**

            Most of thecapital needs of the Bank have historically been financed with retainedearnings and deposits received and the Corporation's primary source ofliquidity is dividends declared by the Bank.  The Corporation and the Bank donot have any long-term debt and do not have plans for material capitalexpenditures in the near future.  The Corporation's average shareholders'equity at March 31,2006 was $107.3 million, a 1.2% increase from the average at December 31, 2005. 

            The Bank issubject to Tennessee statutes and regulations that impose restrictions on theamount of dividends that may be declared.  Furthermore, any dividend paymentsare subject to the continuing ability of the Bank to maintain its compliancewith minimum federal regulatory capital requirements and to retain itscharacterization under federal regulations as a "well-capitalized" institution.The Bank declared a $0.32 per share dividend in the fourth quarter of 2005,which was paid in the first quarter of 2006.  Management believes that theCorporation's traditional sources of cash generated from the Bank's operatingactivities are adequate to meet the Corporation's liquidity needs for normalongoing operations.  The Bank's Board of Directors has adopted a liquiditypolicy that outlines specific liquidity target balances.  Compliance with thispolicy is reviewed quarterly by the Bank's Asset/Liability Committee andresults are reported to the Bank's Board of Directors.

 

TheBank maintains a formal asset and liability management process to controlinterest rate risk and assist management in maintaining reasonable stability inthe gross interest margin as a result of changes in the level of interest ratesand/or the spread relationships among interest rates.  The Bank uses anearnings simulation model to evaluate the impact of different interest ratescenarios on the gross margin.  Each quarter, the Asset/Liability Committee ofthe Bank monitors the relationship of rate sensitive earning assets to ratesensitive interest bearing liabilities (interest rate sensitivity), which isthe principal factor in determining the effect that fluctuating interest rateswill have on future net interest income.  Rate sensitive earning assets andinterest bearing liabilities are financial instruments that can be repriced tocurrent market rates within a defined time period.

 

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**Critical AccountingPolicies**

Theaccounting principles the Corporation follows and the methods of applying theseprinciples conform with accounting principles generally accepted in the United States and with general practices within the banking industry.  In connection withthe application of those principles, the Corporation's management has madejudgments and estimates that, in the case of the determination of the allowancefor loan losses ("ALLL") and the recognition of deferred income taxassets, have been critical to the determination of the Corporation's financialposition, results of operations, and cash flows.

*Allowance for Loan Losses*

           Managementassesses the adequacy of the ALLL prior to the end of each month and prepares amore formal review quarterly to assess the risk in the Bank's loan portfolio. This assessment includes procedures to estimate the allowance and test theadequacy and appropriateness of the resulting balance.  The ALLL representscalculated amounts for specifically identified credit exposure and exposuresreadily predictable by historical or comparative experience.  Even though thiscalculation considers specific credits, the entire allowance is available to absorbany credit losses. 

           These calculatedamounts are determined by assessing loans identified as not in compliance withloan agreements.  These loans are generally in two different risk groups.  Onegroup is unique loans (commercial loans, including those loans consideredimpaired) and the second group is pools of homogenous loans (generally retailloans).  The calculation for unique loans is based primarily on risk ratinggrades assigned to each of these loans as a result of the Bank's loanmanagement and review processes.  Each risk-rating grade is assigned a lossratio, which is determined based on the experience of management, discussionswith banking regulators and the independent loan review process.  The amountallocated for an impaired loan is based on estimated cash flows discounted atthe loan's original effective interest rate or the underlying collateralvalue.  Historical data, including actual loss experience on specific types ofhomogenous loans, is used to allocate amounts for loans or groups of loansmeeting the specified criteria.  More detailed historical data is accumulatedby category of consumer credit and performance characteristics to broaden theanalysis and improve monitoring of potential credit risk.

     Criteria considered inevaluating the adequacy of the ALLL are:

Ÿ        Portfolio quality trends;

•        Changes in the nature and volumeof the portfolio;

•        Present and prospective economicand business conditions, locally and nationally;

•        Management review systems andboard oversight, including external loan review processes;

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

•        Changes in personnel, managementand staff.  

           In assessing theadequacy of the ALLL, the risk characteristics of the entire loan portfolio areevaluated.  This process includes the judgment of the Bank's management, inputfrom independent loan reviews and reviews that may have been conducted by bankregulators as part of their usual examination process.

*Deferred Income TaxAssets*

Deferredincome tax assets consist mainly of the tax effect of excess provisions forloan losses over actual losses incurred and deferred compensation.  Managementbelieves that it is more likely than not that these assets will be realized infuture years.

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**Off-BalanceSheet Arrangements**

TheBank is a party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers.  Thesefinancial instruments include commitments to extend credit and stand-by lettersof credit.  Those instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized in the balance sheet.  The contract ornotional amounts of those instruments reflect the extent of involvement theBank has in those financial instruments.  The total outstanding loancommitments and stand-by letters of credit in the normal course of business at March 31, 2006were $79.9 million and $10.4 million, respectively, compared to $67.9 millionoutstanding loan commitments and $6.7 million stand-by letters of credit in thenormal course of business at March 31, 2005.  The increase in stand-by lettersof credit of approximately $3.7 million, or 55.2%, came from additionalbusiness from existing large commercial customers.  Loan commitments areagreements to lend to a customer as long as there is not a violation of anycondition established in the contract.  Stand-by letters of credit areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party.  Those guarantees are primarily issued to supportpublic and private borrowing arrangements, including commercial paper, bondfinancing and similar transactions.  The credit risk involved in issuingletters of credit is essentially the same as that involved in making a loan.

AtMarch 31, 2006, theCorporation and the Bank did not have any off-balance sheet arrangements otherthan commitments to extend credit and stand-by letters of credit.

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**MaterialChanges in Results of Operations**

Totalinterest income for the first three months of 2006 was $10.1 million comparedto $9.4 million for the first three months of 2005.  Interest and fees earnedon loans and investments are the components of total interest income.  Interestand fees earned on loans were $7.3 million, an increase of approximately $900,000,or 14.13% during the first three months of 2006 compared to the first threemonths of 2005.  Nominal interest earned on investment securities and otherinvestments were $2.8 million, a decrease of approximately $230,000, or  7.60%during the first three months of 2006 compared to the first three months of2005. 

            Total interestexpense in the first three months of 2006 was $3.1 million, an increase of approximately$876,000, or  40.01% compared to the first three months of 2005.  The higher interest rates for certificates ofdeposits and public funds during the first quarter of 2006 was the primaryreason for the higher expense.  As a policy, budgeted financial goals aremonitored on a monthly basis by the Asset/Liability Committee, which reviewsthe actual dollar change in net interest income for different interest ratemovements.  A negative dollar change in net interest income for a 12-monthperiod of less than 4.5% of net interestincome given a 300 basis point shift in interestrates is considered an acceptable rate risk position.  The rate risk analysisfor the 12-month period beginning April 1, 2006 and ending March 31, 2007showed a worst-case potential change to net interest income of a negative 0.06%,or a decline in net interest income of approximately $20.0 million by the endof the period.

            Net interestincome of the Corporation on a fully taxable equivalent basis is influencedprimarily by changes in:

(1)               the volume and mix of earningassets and sources of funding;

(2)               market rates of interest; and 

(3)               income tax rates.

            The impact ofsome of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest incomefrom one period to another.  Some examples of such factors are:

(1)               the strength of credit demands bycustomers;

(2)               Federal Reserve Board monetarypolicy; and

(3)               fiscal and debt managementpolicies of the federal government, including changes in tax laws.

            The netinterest margin, on a tax equivalent basis, at March 31, 2006, March 31,2005 and December, 31, 2005 was 4.16%, 4.13% and 4.21%, respectively.

            No additionswere made to the allowance for loan losses in the first quarter of 2006.  

            Noninterest income was $2.6 million, an increase of $168,000 or 6.8% during the first three monthsof 2006 compared to the first three months of 2005.  Service charges ondeposits provided the most significant portion of this increase in noninterestincome at $225,000, or 14.1%, compared to the first quarter of 2005.

Noninterestexpenses, excluding the provision for possible loan losses, were  $198,000,or 2.6%higher in the first three months of 2006 than in the first three months of 2005.Salaries and benefits expense was up $112,000 or 2.8%, for thethree months ended March 31, 2006 compared to the same period in 2005 as aresult of standard increases in salaries and significant increases in insurancebenefits.    

TheCorporation and the Bank do not have any long-term debt or other obligationswith the exception of leases for bank property.  There has not been a change duringthe three month period ended March 31, 2006 in the terms of these leases.

Provisionfor income taxes for the three months ended March 31, 2006 was $276,000,compared to $868,000 for the three months ended March 31, 2005.  Increases inthe Bank's investment in municipal securities which are exempt from federalincome tax contributed to the decrease in tax expense of $592,000 as of March31, 2006.

Netincome for the three months ended March 31, 2006 was $1.64 million, compared to $2.08 millionfor the three months ended March 31, 2005.  There was a credit to the provision forloan and lease losses in February 2005 in the amount of $796,000 that contributedto the difference between 2006 and 2005.

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**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

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Duringthe three months ended March 31, 2006, there were no materialchanges in the quantitative and qualitative disclosures about market riskpresented in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2005. 

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**Item 4. Controls andProcedures.**

(a) Evaluation ofDisclosure Controls and Procedures.  The Corporation carried out anevaluation, under the supervision and with the participation of management,including the Corporation's Chief Executive Officer and Assistant Treasurer(principal financial officer), of the effectiveness of the design and operationof the Corporation's disclosure controls and procedures as of the end of theperiod covered by this report pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934, as amended (the "Exchange Act").  Based upon thatevaluation, the Chief Executive Officer and Assistant Treasurer (principalfinancial officer) concluded that the Corporation's disclosure controls andprocedures were effective in ensuring that information required to be disclosedby the Corporation (including the Corporation's consolidated subsidiaries) inreports that the Corporation files or submits under the Exchange Act isrecorded, processed, summarized and reported in a timely manner.

(b) Changes in InternalControl Over Financial Reporting.  There has been no change in theCorporation's internal control over financial reporting that occurred duringthe first quarter of 2006 that has materially affected, or is reasonably likelyto materially affect, the Corporation's internal control over financial reporting.

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**PART II OTHER INFORMATION**

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**Item1A. Risk Factors.**

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Therehave been no material changes in the risk factors previously disclosed in theCorporation's Annual Reportt on Form 10-K for the year ended December 31, 2005.

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**Item 6.  Exhibits.**

EXHIBIT

NUMBER          DESCRIPTION

     3.1     Charter. (1)

     3.2     Articles ofAmendment to Charter. (1)

     3.3     Amended andRestated By-laws. (2)

     4.1     Form ofSpecimen Stock Certificate. (1)

   31.1    Certification of the Chief ExecutiveOfficer of First Farmers and Merchants Corporation Pursuant to Rule 13a-14(1)of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

    31.2    Certification of the Chief FinancialOfficer of First Farmers and Merchants Corporation Pursuant to Rule 13a-14(1)of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

    32.1    Certification of the Chief ExecutiveOfficer and Chief Financial Officer of First Farmers and Merchants CorporationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

                              

(1)  Incorporated byreference from the First Farmers and Merchants Corporation Amendment No. 1 tothe Annual Report on Form 10-K/A for the year ended December 31, 2003, FileNumber 0-1972, as filed with the Securities and Exchange Commission on May 7, 2004.

(2)  Incorporated byreference from the First Farmers and Merchants Corporation Current Report onForm 8-K,  File Number 0-10972, as filed with the Securities and ExchangeCommission on December 21, 2005.

            

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

FIRST FARMERS AND MERCHANTS CORPORATION

(Registrant)

Date             May 8,2006                                                      /s/ T. RandyStevens                                

                                    T. Randy Stevens,President/Chief Executive Officer

Date             May 8,2006                                              /s/ Patricia P.Moody                                       

PatriciaP. Moody, Assistant Treasurer (principal financial officer and principalaccounting officer)