United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

**FORM 10-Q**

Mark One

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

      For the quarterlyperiod ended June 30, 2005

or

[  ] **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

      For the transitionperiod from ___________ to ___________

** **

Commission File Number:  _0-10972_

| First Farmers and Merchants Corporation                                             |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its  charter)                             |
|                                                                                     |  |
| Tennessee                                                                           | 62-1148660 |
| (State or other jurisdiction of incorporation or organization)                      | (I.R.S. Employer Identification No.) |
|                                                                                     |  |
| 816 South Garden Street                                                             |  |
| Columbia, Tennessee                                                                 | 38402 - 1148 |
| (Address of principal executive offices)                                            | (Zip Code) |
|                                                                                     |
| (931) 388-3145                                                                      |
| (Registrant's telephone number, including area code)                                |
|                                                                                     |
| Not Applicable                                                                      |
| (Former name, former address and former fiscal year,  if changed since last report) |

     Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes         No   X  

     Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).   Yes  __X__    No  _____

     Indicate the number ofshares outstanding of each of the issuer's classes of common stock, as of thelatest practicable date.   5,840,000 shares as of July 31, 2005

**PART  - FINANCIAL INFORMATIO**N

**Item 1. FinancialStatements.**

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

Consolidatedbalance sheets - June 30, 2005, and December 31, 2004.

Consolidatedstatements of income - For the three months and six months ended June 30, 2005, and June 30, 2004.

Consolidatedstatements of cash flows - For the six months ended June 30, 2005, and June 30, 2004.

Selectednotes to consolidated financial statements.

| **FIRST FARMERS AND  MERCHANTS CORPORATION AND SUBSIDIARY** |
|-------------------------------------------------------------|
| **CONSOLIDATED BALANCE  SHEETS**                            |
|                                                             |  |
|                                                             |  |  |  |  |  |
|                                                             |  | **      June 30,** |  | December 31, |
|                                                             | *(Dollars in Thousands)* |  | **2005** |  | 2004 |
|                                                             |  |  | (Unaudited) |  | (1) |
| **ASSETS**                                                  | Cash and due from banks | $ | **50,345** | $ | 22,203 |
|                                                             | Interest-bearing deposits in banks |  | **48** |  | 48 |
|                                                             | Total cash and cash  equivalents |  | **50,393** |  | 22,251 |
|                                                             | Securities |  |  |  |  |
|                                                             |     Available for sale (amortized cost $213,724 |  |  |  |  |
|                                                             |           and $225,880, respectively) |  | **213,230** |  | 226,792 |
|                                                             |     Held to maturity (fair value $96,512 |  |  |  |  |
|                                                             |          and $79,722, respectively) |  | **93,909** |  | 76,267 |
|                                                             |               Total securities |  | **307,139** |  | 303,059 |
|                                                             | Loans, net of deferred fees |  | **448,474** |  | 449,053 |
|                                                             |     Allowance for possible loan losses |  | **(8,007)** |  | (8,509) |
|                                                             |               Net loans |  | **440,467** |  | 440,544 |
|                                                             | Bank premises and equipment, at cost |  |  |  |  |
|                                                             |          less allowance for depreciation |  | **12,241** |  | 12,417 |
|                                                             | Core deposit and other intangibles |  | **11,458** |  | 11,986 |
|                                                             | Other assets |  | **24,550** |  | 24,228 |
|                                                             |             TOTAL ASSETS | **$** | **846,248** | $ | 814,485 |
|                                                             |  |  |  |  |  |
|                                                             |  |  |  |  |  |
| **LIABILITIES**                                             | Deposits |  |  |  |  |
|                                                             |      Noninterest-bearing | **$** | **143,163** | $ | 115,583 |
|                                                             |      Interest-bearing (including certificates of deposit |  |  |  |  |
|                                                             |           over $100,000:  2005 - $73,200; 2004 - $71,588) |  | **577,197** |  | 578,272 |
|                                                             |             Total deposits |  | **720,360** |  | 693,855 |
|                                                             | Federal funds purchased and securities sold |  |  |  |  |
|                                                             |            under agreements to repurchase |  | **12,139** |  | 9,128 |
|                                                             | Dividends payable |  | **1,810** |  | 1,752 |
|                                                             | Other short term liabilities |  | **553** |  | 614 |
|                                                             | Accounts payable and accrued liabilities |  | **5,823** |  | 4,948 |
|                                                             |             TOTAL LIABILITIES |  | **740,685** |  | 710,297 |
|                                                             |  |  |  |  |  |
|                                                             |  |  |  |  |  |
| **SHAREHOLDERS'**                                           | Common stock - $10 par value, 8,000,000 shares |  |  |  |  |
| **EQUITY**                                                  |         authorized;  issued and outstanding - |  |  |  |  |
|                                                             |         5,840,000 |  | **58,400** |  | 58,400 |
|                                                             | Additional paid-in capital |  | **4,320** |  | 4,320 |
|                                                             | Retained earnings |  | **43,147** |  | 40,908 |
|                                                             | Accumulated other comprehensive income |  | **(304)** |  | 560 |
|                                                             |             TOTAL SHAREHOLDERS' EQUITY |  | **105,563** |  | 104,188 |
|                                                             |  |  |  |  |  |
|                                                             |             TOTAL LIABILITIES AND |  |  |  |  |
|                                                             |                 SHAREHOLDERS' EQUITY | **$** | **846,248** | $ | 814,485 |
|                                                             |  |  |  |  |  |
|                                                             |  |  |  |  |  |

|       (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**                      |
|  |                                                             |  |  |  |  |
|  |                                                             |  |  |  |  |  |  |  |  |  |
|  |                                                             | *(Dollars In Thousands Except Per Share  Data)* |  | Three Months Ended |  |  

Six Months Ended

 
*(Unaudited)*

June 30,

June 30,

 

 
**2005**

2004

**2005**

2004

 
 
**INTEREST INCOME**

Interest and fees on loans

**$**

**6,556**

$

5,825

**$**

**12,924**

$

11,875

 
Income on investment securities

 
     Taxable interest

**2,233**

2,664

**4,520**

5,374

 
     Exempt from federal income tax

**736**

631

**1,405**

1,256

 
     Dividends

**32**

128

**66**

155

 
**3,001**

3,423

**5,991**

6,785

 
Other interest income

**90**

26

**126**

56

 
    TOTAL INTEREST INCOME

**9,647**

9,274

**19,041**

18,716

 
 
**INTEREST EXPENSE**

Interest on deposits

**2,342**

2,060

**4,492**

4,246

 
Interest on other short-term borrowings

**21**

8

**60**

11

 
      TOTAL INTEREST EXPENSE

**2,363**

2,068

**4,552**

4,257

 
 
            NET INTEREST INCOME

**7,284**

7,206

**14,489**

14,459

 
PROVISION FOR POSSIBLE LOAN LOSSES

**  -**

(677)

**(796)**

(677)

 
 
      NET INTEREST INCOME AFTER

 
           PROVISION FOR LOAN LOSSES

**7,284**

7,883

**15,285**

15,136

 
 
**NONINTEREST  INCOME**

Trust department income

**526**

534

**1,114**

1,057

 
Service fees on deposit accounts

**1,861**

1,868

**3,451**

3,581

 
Other service fees, commissions, and fees

**112**

113

**205**

210

 
Other operating income

**247**

228

**434**

628

 
Securities gains

**  -**

 -

**  -**

917

 
      TOTAL NONINTEREST  INCOME

**2,746**

2,743

**5,204**

6,393

 
 
**NONINTEREST  EXPENSES**

Salaries and employee benefits

**3,969**

4,055

**7,992**

8,041

 
Net occupancy expense

**570**

545

**1,173**

1,118

 
Furniture and equipment expense

**298**

317

**591**

660

 
Other operating expenses

**2,549**

2,652

**5,137**

5,210

 
      TOTAL NONINTEREST EXPENSES

**7,386**

7,569

**14,893**

15,029

 
           INCOME BEFORE PROVISION FOR

 
INCOME TAXES

**2,644**

3,057

**5,596**

6,500

 
PROVISION FOR INCOME TAXES

**679**

805

**1,547**

1,787

 
 
 
                  NET INCOME	

**$**

**1,965**

$

2,252

**$**

**4,049**

$

4,713

 
 
 
**Common stock**

Common stock	

 
                   (5,840,000 in 2005 and 2004)

**$**

**0.34**

$

0.39

**$**

**0.69**

$

0.81

 
(1)  Per share data  has been restated to give retroactiveeffect to the two-for-one stock split effected as a stock dividend declared onApril 20, 2004.   

      The accompanying notes are an integral part of theconsolidated financial statements.                                                                                                                                                                                                                                                              

      

**FIRST FARMERS AND  MERCHANTS CORPORATION AND SUBSIDIARY                **

**CONSOLIDATED  STATEMENTS OF CASH FLOWS                 **

*(Dollars In Thousands)*

*(Unaudited)*

Six Months Ended June 30, 

**2005**

2004

**OPERATING**

Net income

**$**

**4,049**

$

4,713

**ACTIVITIES**

   Adjustments to reconcile net income to net cash  provided

     by operating activities

       Excess (deficiency) of provision for possible loan  losses

          over net charge offs

**(502)**

(1,360)

       Provision for depreciation and amortization of

          premises and equipment

**617**

604

       Amortization of deposit base intangibles

**528**

528

       Amortization of investment security premiums,

          net of accretion of discounts

**1,212**

1,392

       Securities gains

**  -**

(917)

       Increase in cash surrender value of life insurance  contracts

**(117)**

(219)

       (Increase) decrease in

            Deferred income taxes

**227**

496

            Interest receivable

**129**

197

            Other assets

**234**

(728)

       Increase (decrease) in

            Interest payable

**313**

(52)

            Other liabilities

**546**

(322)

               Total adjustments

**3,187**

(381)

               Net cash provided by operating activities

**7,236**

4,332

**INVESTING**

Proceeds from maturities, calls, and sales of

**ACTIVITIES**

      available-for-sale securities

**25,115**

23,872

Proceeds from maturities and calls of held-to-maturity  securities

**5,500**

10,473

Purchases of investment securities

      Available-for-sale

**(14,117)**

(27,537)

      Held-to-maturity

**(23,195)**

(12,732)

Net decrease in loans

**579**

4,396

Purchases of premises and equipment

**(440)**

(355)

Purchase of single premium life insurance contract

**(254)**

(253)

               Net cash used in investing activities

**(6,812)**

(2,136)

**FINANCING**

Net increase (decrease) in noninterest-bearing

**ACTIVITIES**

      and interest-bearing deposits

**26,506**

(4,617)

Net increase in short term borrowings

**2,964**

12,668

Cash dividends

**(1,752)**

(1,635)

               Net cash provided by financing activities

**27,718**

6,416

Increase in cash and cash equivalents

**28,142**

8,612

Cash and cash equivalents at beginning of period

**22,251**

38,434

Cash and cash equivalents at end of period

**$**

**50,393**

$

47,046

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

 
**SELECTED NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE 1 - OTHERINFORMATION**

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 footnotes required bygenerally accepted accounting principles for complete financial statements.  Inthe opinion 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.  Forfurther information, refer to the consolidated financial statements andfootnotes included in First Farmers and Merchants Corporation's annual reporton Form 10-K for the year ended December 31, 2004.

**NOTE 2 - STOCK DIVIDEND**

At the Annual Shareholders' Meeting on April 20, 2004, theCorporation announced a two-for-one stock split effected as a 100% stockdividend payable to shareholders of record as of April 20, 2004.  TheCorporation issued an additional share of common stock for each share of commonstock outstanding, which resulted in 5,840,000 shares of common stock issuedand outstanding at a par value of $10 per share.  The transaction was recordedas a transfer from retained earnings to common stock in the amount of$29,200,000 ($10 for each of the 2,920,000 additional shares issued).  All pershare and share data in the accompanying consolidated financial statements andfootnotes have been restated to give retroactive effect to this transaction.

**NOTE 3 - SUBSIDIARY CHARTER**

            TheCorporation's subsidiary Bank received regulatory approval to convert itsnational charter to a state charter, which conversion became effective as of July5, 2005.  On that date, the Bank converted to a Tennessee state-chartered bankand its name changed from First Farmers and Merchants National Bank to FirstFarmers and Merchants Bank.

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

** **

**FORWARD-LOOKING STATEMENTS**

Certainstatements contained in this report may not be based on historical facts andare "forward-looking statements" within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements may beidentified by, among other things, the use of forward-looking terminology suchas "anticipates," "could," "expects," "believes," "may," or"will," or the negatives of such terms.  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 economicconditions; fluctuations in prevailing interest rates and the effectiveness ofour risk monitoring systems; the ability of our borrowers to repay loans;adverse changes in our special mention credits; our ability to sellavailable-for-sale securities to fund increased loan demand; our ability tomeet regulatory capital adequacy requirements; our ability to meet liquidityneeds from operating activities; the accuracy of assumptions in our rate riskanalysis; our ability to recognize deferred tax assets; our ability to maintaincredit quality; our ability to provide market competitive products andservices; laws and regulations affecting financial institutions in general; ourability to control factors influencing net interest income; and other factorsgenerally understood to affect the financial results of financial services companies.

**EXECUTIVE OVERVIEW**

AtJune 30, 2005, the consolidated total assets of First Farmers and MerchantsCorporation (the "Corporation") were $846,248, its consolidated net loans were$440,467, its total deposits were $720,360, and its total shareholders' equitywas $105,563.  The loan portfolio at June 30, 2005, increased $6,142 or 1.4% comparedto March 31, 2005; however, the portfolio at June 30, 2005, increased $7,063 or1.6% compared to May 31, 2005.  The retail portion of the portfolio experienceda 2.3% increase for the first six months of 2005 while the commercial portfoliosaw a decline of 3.0% over the same period.  Several factors led to the declinein commercial loans during the first six months of 2005, including continuedstagnation in commercial loan volume and the payoff of several large commercialloans, including a large classified loan, and the sale of a large classifiedloan.  Total deposits increased $26,505 or 3.8% and shareholders' equityincreased 1.3% during the first six months of 2005.  Shareholders' equity, notincluding accumulated other comprehensive income, increased 2.2% in the first sixmonths of 2005.  Total shareholders' equity includes an unrealized loss onavailable-for-sale securities of $304.

**MATERIAL CHANGES IN FINANCIAL CONDITION**

Averageearning assets for the three months ended June 30, 2005 were up 0.6% fromaverage earning assets at March 31, 2005 but down 0.7% from December 31, 2004. A decline in loan volume in the first quarter of 2005 occurred near the end ofthe quarter but management believes that trend was beginning to reverse by theend of the second quarter of 2005.  As a result, average loans at June 30, 2005were down 0.5% from average loans at March 31, 2005.  Average overnightinvestments at June 30, 2005, were up $3.5 million compared to March 31, 2005 andup $1.7 million compared to December 31, 2004.  This increase was attributableto the decline in loan volume.  Average investment securities at June 30, 2005 weredown 5.1% compared to the average at December 31, 2004.  Average total assetsof $819 million at June 30, 2005 decreased 0.8% compared to an average of $825million at December 31, 2004.

**Securities**

Available-for-salesecurities are an integral part of the asset/liability management process forthe Bank.  Accordingly, they represent an important source of liquidityavailable to fund loans and accommodate asset reallocation strategies dictatedby changes in the Bank's operating and tax plans, shifting yield spreadrelationships, and changes in configuration of the yield curve.  At June 30,2005, the Bank's investment securities portfolio had $213.2 millionavailable-for-sale securities and $93.9 million held-to-maturity securities. There were $226.8 million available-for-sale securities and $76.3 millionheld-to-maturity securities at December 31, 2004.  The 6.0% decrease inavailable-for-sale securities for the six months ended June 30, 2005, 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.  No investmentsecurities were sold in the second quarter of 2005.  The 23.1% increase in theinvestment in held-to-maturity securities was a result of a strategy toincrease the investment in municipal securities with a maturity of fifteen toseventeen years to shelter taxable income and improve income lost as loanvolume fell short of budget projections.

**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 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 37% of the total loan portfolio atJune 30, 2005.  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 comprised 21% ofthe portfolio at June 30, 2005 and have a higher level of risk and historicalloss experience than residential mortgage loans.  There is not an industryconcentration as measured by regulatory guidelines.  However, the Bank doeshave heavy exposure in four broad industry categories which includeconstruction, real estate renting and leasing, other services (churches), andpublic administration.  These industries are monitored closely to ensure thatunderwriting practices, policies and loss allowance levels match the level ofrisk posed.  All loans are expected to be repaid from cash flow or proceedsfrom the sale of selected assets of the borrowers.  Collateral requirements forthe loan portfolio are based 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 theBoard of Directors.  This evaluation supported a reversal of specificallocations in the allowance during the first quarter of 2005 as a result ofthe resolution of certain problem loans associated with those specificallocations.  Credit quality continued to improve during the second quarter asindicated by declines in the volume of loans with past due payments andpotential problem loans.  The allowance for possible loan and lease losses was$8.0 million or 1.8% of gross loans at June 30, 2005.  This compares to $8.5million or 1.9% at December 31, 2004.  Net recoveries through June 30, 2005were $297,000 which results in an annualized net charge-off ratio of  -0.14%.

Aformal process is in place to provide control over underwriting of loans andmonitor their 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 characteristicsand control of corrective actions, and objective monitoring of loan reviews.  ASpecial Assets Department of the Bank identifies and monitors assets that needattention.  At June 30, 2005, this process identified loans totaling $11.1million, or 2.5% of the portfolio, that were classified as other assets especiallymentioned.  This compares to loans totaling $6.7 million so classified at December31, 2004.  The increase at June 30, 2005, warrants close attention; but,knowledge of the two large credits accounting for the increase leads managementto anticipate no significant migration to more severely classified levels.  Loanstotaling $6.2 million, 1.4% of the portfolio, were classified as substandard atJune 30, 2005.  This compares to loans totaling $11.2 million, 2.5% of theportfolio, so classified at December 31, 2004.  Loans totaling $0.8 million or0.20% of the portfolio were classified as doubtful at June 30, 2005.  This comparesto $1.0 million, 0.23% of the portfolio, so classified at December 31, 2004. Loans having recorded investments of $3.0 million, or 0.7% of the totalportfolio, were identified as impaired at June 30, 2005 compared to $5.5million, 1.2% of the portfolio, at December 31, 2004.  

During the second quarter of 2005, there were write downs totaling$0.004 million of other real estate associated with declines in real estatevalues subsequent to foreclosure and disposition of the properties at less thantheir carrying value that were charged to current income.  The carrying valueof other real estate is included in other assets on the balance sheet andrepresents real estate acquired through foreclosure and is stated at the lowerof cost or fair value minus cost to sell.  An allowance for other real estateowned is not maintained.  Any decreases or losses associated with theproperties have been charged to current income.

**Deposits**

            The Bank doesnot have any foreign offices and all deposits are serviced in its twenty-one domesticoffices.  The Bank's average deposits declined 1.2% during the first six monthsof 2005 compared to a decline of 5.6% in the first six months of 2004.  Theprimary reason for the decrease in the decline of average deposits betweenthese periods is that the Bank changed its strategy for pricing short termlarge dollar certificates of deposit.  By being more aggressive in pricingthese deposits in 2005 than in 2004, the decline in deposits has slowed. Average total noninterest-bearing deposits were 16.4% of total deposits at June30, 2005, contributing to the Bank's low cost of deposits.  This compares to 16.2%at December 31, 2004.

**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 its subsidiary, theBank.  The regulations require the Bank to meet specific capital adequacyguidelines that involve 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 regulation to ensure capital adequacy require theCorporation and the Bank to maintain minimum amounts and ratios of TotalCapital and Tier I Capital to risk-weighted assets and of Tier I Capital toaverage assets.   Equity capital (net of certain adjustments for intangibleassets and investments in non-consolidated subsidiaries and certain classes ofpreferred stock) is considered Tier 1 ("core") capital.  Tier 2("total") capital consists of core capital plus subordinated debt,some types of preferred stock, and a defined percentage of the allowance forpossible loan losses.  As of June 30, 2005, the Corporation's total risk-basedand core capital ratios were 19.0% and 17.8%, respectively.  The comparableratios were 19.6% and 18.4% at December 31, 2004.  As of June 30, 2005, theBank's total risk-based and core capital ratios were 19.8% and 18.4%,respectively.  As of June 30, 2005, the Corporation and the Bank had a ratio ofcore capital to average total assets ratio of 11.2% and 11.5%, respectively,compared to 11.3 % and 11.1% at December 31, 2004.  Management believes, as of June30, 2005, that the Corporation and the Bank meet all capital adequacyrequirements to which they are subject.

**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 June 30, 2005 was $105.4million, a 1.48% increase from the average at December 31, 2004.  The approvalof the Office of the Comptroller of the Currency ("OCC") is required before theBank's dividends in a given year may exceed the total of its net profit (asdefined by the OCC) for the year, combined with retained net profits of thepreceding two years.  As of June 30, 2005,the Bank could have declared additional dividends of approximately $10.7million without regulatory agency approval.  The Bank declared a $0.31 pershare dividend in the second quarter of 2005.  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 adopted a liquidity policythat outlines specific liquidity target balances.  The formal review ofcompliance with this policy is monitored quarterly by the Bank'sAsset/Liability Committee and results are reported to the 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 month, the Asset/Liability Committee ofthe Bank monitors the relationship of rate sensitive earning assets to ratesensitive interest bearing liabilities (interest rate sensitivity) which is theprincipal factor in determining the effect that fluctuating interest rates willhave on future net interest income.  Rate sensitive earning assets and interestbearing liabilities are financial instruments that can be repriced to currentmarket rates within a defined time period.

**Critical AccountingPolicies**

Theaccounting principles the Bank follows and the methods of applying theseprinciples conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry.  Inconnection with the application of those principles, the Bank's management hasmade judgments and estimates that, in the case of the determination of theallowance for loan losses ("ALLL") and the recognition of deferredincome tax assets, have been critical to the determination of the Bank'sfinancial position, 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 toabsorb any 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).  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 our loan management andreview processes.  Each risk-rating grade is assigned a loss ratio, which isdetermined based on the experience of management, discussions with bankingregulators, and the independent loan review process.  The amount allocated forimpaired loans is based on estimated cash flows discounted at the loan'soriginal effective interest rate or the underlying collateral value. Historical data, including actual loss experience on specific types of homogenousloans, is used to allocate amounts for loans or groups of loans meeting thespecified criteria.  More detailed historical data is being accumulated bycategory 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:

•       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 proc esses;

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

•       Changes in personnel, management,and staff.  

           In assessing theadequacy of the ALLL, the risk characteristics of the entire loan portfolio areevaluated.  This process includes the judgment of management, input fromindependent 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.  TheCorporation and the Bank have paid taxes for many years.  Management believesthat it is more likely than not that these assets will be realized in futureyears.

**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 standby 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 June 30, 2005, were $69.4 million and $8.9million, respectively.  These totals compare to $67.9 million outstanding loancommitments and $6.7 million stand-by letters of credit in the normal course ofbusiness at March 31, 2005.  Loan commitments are agreements to lend to acustomer as long as there is not a violation of any condition established inthe contract.  Standby letters of credit are conditional commitments issued bythe Bank to guarantee the performance of a customer to a third party.  Thoseguarantees are primarily issued to support public and private borrowingarrangements, including commercial paper, bond financing, and similartransactions.  The credit risk involved in issuing letters of credit isessentially the same as that involved in making a loan.

AtJune 30, 2005 and December 31, 2004, theCorporation and the Bank did not have any off-balance sheet arrangements otherthan commitments to extend credit and stand-by letters of credit.

** **

**MATERIAL CHANGES IN RESULTS OF OPERATIONS**

Totalinterest income for the first six months of 2005 was $19,041 compared to $18,716for the first six months of 2004.  Total interest income for the three monthsending June 30, 2005, was $6,556 compared to $5,825 for the three months June30, 2004.  Interest and fees earned on loans and investments are the componentsof total interest income.  Interest and fees earned on loans increased 8.8% duringthe first six months of 2005 compared to the first six months of 2004 and increased12.5% during the three months ending June 30, 2005 compared to the three monthsending June 30, 2004, as a result of the increase in the volume of averageloans.  Interest earned on investment securities and other investmentsdecreased 10.6% during the first six months of 2005 compared to the first sixmonths of 2004 and decreased 10.4% for the three months ending June 30, 2005compared to the three months ending June 30, 2004, as a result of the reduced volumeof investment securities and higher yielding investments maturing and beingreplaced with investments at lower yields.

            Total interestexpense in the first six months of 2005 increased 6.9% compared to the first sixmonths of 2004 and increased 14.3% in the three months ending June 30, 2005,compared to the three months ending June 30, 2004.  As a policy, budgeted financial goals are monitored on a monthlybasis by the Asset/Liability Committee which reviews the actual dollar changein net interest income given different interest rate movements.  A negativedollar change in net interest income for a twelve-month period of less than 4.5% of net interest income givena three hundred basis point shift in interest rates is considered an acceptablerate risk position.  The rate risk analysis for the twelve-month periodbeginning July 1, 2005 and ending June 30,2006 showed a worst-case potential change to net interest income of a negative 0.8%,or a decline in net interest income of $212,000.

            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 of some of thesefactors can be controlled by management policies and actions.  External factorsalso can have a significant impact on changes in net interest income from oneperiod 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 net interest margin, ona tax equivalent basis, at June 30, 2005,June 30, 2004, and December, 31, 2004 was4.14%, 4.10%, and 4.13%, respectively.

            No additionswere made to the allowance for loan losses in the second quarter of 2005 or thesecond quarter of 2004.  A credit was taken as of February 28, 2005, in theamount of $796,000 based upon unexpected loss recoveries and substantialreductions in the level of criticized assets during the period.

            Noninterestincome decreased 18.6% during the first six months of 2005 compared to thefirst six months of 2004 and did not change much in the three months endingJune 30, 2005, compared to the three months ending June 30, 2004.  The decreaseduring the first six months resulted from:

(1)   A decline in thelevel of overdrawn account service fees;

(2)   There were no gains on the sale ofavailable-for-sale securities to compare to the $917 gain on the sale ofavailable-for-sale securities in the first quarter of 2004.

Noninterestexpenses, excluding the provision for possible loan losses, were 0.9% less inthe first six months of 2005 than in the first six months of 2004 and they were2.4% less in the quarter ending June 30, 2005, compared to the quarter endingJune 30, 2004.  These declines were a result of effective cost controls in salaryadministration, furniture and equipment expenses, and other operating expenses.

TheCorporation and the Bank do not have any long-term debt or other obligationswith the exception of certain operating leases.  There has not been a change duringthe six month period ending June 30, 2005 in these operating leases.

Netincome for the six months ending June 30, 2005, was $5.596 million, compared to$6.500 million for the six months ending June 30, 2004.  Net income for thethree months ending June 30, 2005 was $1.965 million compared to $2.252 millionfor the three months ending June 30, 2004.  Noninterest income for the firstsix months of June 30, 2004 included a gain on the sale of available-for-salesecurities that contributed to the higher earnings for that period compared tothe first six months of June 30, 2005.  Lower service fees on deposit accountswere the reason for the decline in the three months ending June 30, 2005compared to the three months ending June 30, 2004.

** **

** **

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

** **

Duringthe quarter ended June 30, 2005, therewere no material changes in the quantitative and qualitative disclosures aboutmarket risk presented in the Corporation's Annual Report on Form 10-K for theyear ended December 31, 2004. 

** **

**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 Chief FinancialOfficer, of the effectiveness of the design and operation of the Corporation'sdisclosure controls and procedures as of the end of the period covered by thisreport pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCorporation's disclosure controls and procedures were effective in ensuringthat information required to be disclosed by the Corporation (including theCorporation's consolidated subsidiaries) in reports that the Corporation filesor submits under the Securities Exchange Act of 1934, as amended, is recorded,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 second quarter of 2005 that has materially affected, or is reasonablylikely to materially affect, the Corporation's internal control over financial reporting.

**PART II - OTHER INFORMATION**

** **

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

** **

            The annual meeting for shareholders of theCorporation was held on Tuesday, April 21, 2005.  At the meeting, the electionof directors was voted upon by the Corporation's shareholders.  At the meeting,votes were cast as follows:

                                                                                          VotesIn        Votes             Votes

                                                                                           Favor       Abstained         Against   

Kenneth A. Abercrombie

James L. Bailey, Jr.

Hulet M. Chaney

H. Terry Cook, Jr.

Tom Napier Gordon

Dr. O. Rebecca Hawkins

Dr. Joseph W. Remke, III

T. Randy Stevens

John P. Tomlinson, III

William R. Walter

Dan C. Wheeler

Dr. David S. Williams

W. Donald Wright

James E. York

3,872,277

3,870,537

3,872,337

3,871,937

3,673,421

3,871,657

3,871,657

3,866,826

3,866,886

3,870,293

3,872,337

3,872,277

3,872,337

3,872,337

-

-

-

-

-

-

-

-

-

-

-

-

-

-

      60

   1800

   -

      400

 199,220

      680

     680

    5,511

   5,451

   5,976

    -

       60

   -

    -

            As indicated in the above table, Kenneth A. Abercrombie, James L. Bailey, Jr., Hulet M.Chaney, H. Terry Cook, Jr., Tom Napier Gordon, Dr. O. Rebecca Hawkins, Dr.Joseph W. Remke, III, T. Randy Stevens, John P. Tomlinson, III, William R.Walter, Dan C. Wheeler, Dr. David S. Williams, W. Donald Wright and James E.York, were elected as directors of the Corporation.  The terms of thedirectors will expire at the annual meeting of shareholders in 2006, but notbefore their respective successors are elected and qualified.

**Item 5.  OtherInformation.**

** **

**...........**Waymon L. Hickman retired as chairman of the Board ofDirectors effective April 21, 2005.

** **

**Item 6.  Exhibits.**

EXHIBIT

NUMBER          DESCRIPTION

                                                                                                                                                                

     3.1     Charter. (a)

     3.2     Articles ofAmendment to Charter. (a)

     3.3     By-laws. (a)

     3.4     Amendment toBy-laws.(b)

     4.1     Form ofSpecimen Stock Certificate. (a)

   10.1     Memorandum of Understanding amongFirst Farmers and Merchants National Bank, First Farmers and MerchantsCorporation, and Waymon L. Hickman, dated April 29, 2005. 

    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.

                                        

(a)   Incorporated by reference from theFirst Farmers and Merchants Corporation Amendment No. 1 to the Annual Report onForm 10-K/A for the year ended December 31, 2003, as filed with the Securitiesand Exchange Commission on May 7, 2004.

(b)   Incorporated by reference from theFirst Farmers and Merchants Corporation Quarterly Report on Form 10-Q for thequarter ended March 31, 2004, as filed with the Securities and Exchange Commissionon May 10, 2004.

**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                        	August 2, 2005  

 

/s/ T. Randy Stevens

T. Randy Stevens, President/Chief Executive Officer
         
Date                         August 2, 2005

 

/s/ Patricia N. McClanahan

Patricia N. McClanahan, Chief Financial Officer |