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 September 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 andMerchants Corporation________________________

(Exact name of registrant as specified in its charter)

_____________________Tennessee_____________________        ___________62-1148660__________

    (State or otherjurisdiction of incorporation or organization)          (I.R.S. EmployerIdentification No.)

                                    816 South Garden Street

_________      ___Columbia, Tennessee____________      __________38402 - 1148__________

                  (Addressof 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  X       No     

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

     Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).     Yes ______            No __X___     

     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 October 31, 2005

**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 - September 30, 2005 and December 31, 2004.

Consolidatedstatements of income - For the three months and nine months ended September 30,2005 and September 30, 2004.

Consolidatedstatements of cash flows - For the ninemonths ended September 30, 2005 and September30, 2004.

Selectednotes to consolidated financial statements.

| **FIRST FARMERS AND  MERCHANTS CORPORATION AND SUBSIDIARY** |
|-------------------------------------------------------------|
| **CONSOLIDATED BALANCE  SHEETS**                            |
|                                                             |  |  
**September 30,**

December 31,

**(Dollars in Thousands)**

**2005**

2004

(Unaudited)

(1)

**ASSETS**

Cash and due from banks

$

**22,762**

$

22,203

Interest-bearing deposits in banks

**49**

48

              Total cash and cash equivalents

**22,811**

22,251

Securities

    Available for sale (amortized cost $200,624

         and $225,880, respectively)

**198,724**

226,792

    Held to maturity (fair value $95,973

         and $79,722, respectively)

**93,948**

76,267

              Total securities

**292,672**

303,059

Loans, net of deferred fees

**456,990**

449,053

    Allowance for possible loan losses 

**(7,906)**

(8,509)

              Net loans

**449,084**

440,544

Bank premises and equipment, at cost

         less allowance for depreciation

**12,024**

12,417

Core deposit and other intangibles

**11,194**

11,986

Other assets

**25,541**

24,228

            TOTAL ASSETS

**$**

**813,326**

$

814,485

**LIABILITIES**

Deposits

     Noninterest-bearing

**$**

**112,033**

$

115,583

     Interest-bearing (including certificates of deposit

      over $100,000: $88,972 and $71,588, respectively)

**579,352**

578,272

            Total deposits

**691,385**

693,855

Federal funds purchased and securities sold

           under agreements to repurchase

**5,646**

9,128

Dividends payable

**  -**

1,752

Other short-term liabilities

**1,406**

614

Accounts payable and accrued liabilities

**7,741**

4,948

            TOTAL LIABILITIES

**706,178**

710,297

**SHAREHOLDERS'**

Common stock - $10 par value, 8,000,000 shares

**EQUITY**

       authorized; 5,840,000 shares

                issued and outstanding

**58,400**

58,400

Additional paid-in capital

**4,320**

4,320

Retained earnings 

**45,596**

40,908

Accumulated other comprehensive (loss) income

**(1,168)**

560

            TOTAL SHAREHOLDERS' EQUITY

**107,148**

104,188

            TOTAL LIABILITIES AND

                SHAREHOLDERS' EQUITY

**$**

**813,326**

$

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	

Nine Months Ended	

(Unaudited)

September 30,

September 30,

**2005**

2004

**2005**

2004

** **

** **

**INTEREST INCOME**

Interest and fees on loans

$

**  6,917**

 $	

 6,202	

 $ 

**  19,840**

 $ 

 18,078	

** **

Income on investment securities

** **

** **

** **

     Taxable interest

**  2,084**

 2,497	

**    6,604**

    7,871	

** **

     Exempt from federal income tax

**     888**

     652	

**    2,293**

    1,908	

** **

     Dividends

**        35**

       31	

**        101**

       185	

** **

**  3,007**

 3,180	

**    8,998**

    9,964	

** **

Other interest income

**        38**

       11	

**        164**

         63	

** **

    TOTAL INTEREST INCOME

**  9,962**

 9,393	

**  29,002**

 28,105	

** **

** **

** **

**INTEREST EXPENSE**

Interest on deposits

**  2,532**

 2,055	

**    7,024**

    6,301	

** **

Interest on other short-term borrowings

**        55**

       25	

**        115**

         36	

** **

      TOTAL INTEREST EXPENSE

**  2,587**

 2,080	

**    7,139**

    6,337	

** **

** **

** **

** **

            NET INTEREST INCOME

**  7,375**

 7,313	

**  21,863**

 21,768	

** **

PROVISION FOR POSSIBLE LOAN LOSSES

**      (94)**

    -	

**      (890)**

     (677)

** **

** **

** **

** **

      NET INTEREST INCOME AFTER

** **

** **

** **

           PROVISION FOR LOAN LOSSES

**  7,469**

 7,313	

**  22,753**

 22,445	

** **

** **

** **

**NONINTEREST  INCOME**

Trust department income

**     567**

     523	

**    1,680**

    1,579	

** **

Service fees on deposit accounts

**  1,868**

 1,853	

**    5,318**

    5,434	

** **

Other service fees, commissions, and fees

**        84**

       92	

**        290**

       302	

** **

Other operating income

**     183**

     202	

**        617**

       830	

** **

Securities gains

**     513**

    -	

**        513**

       917	

** **

      TOTAL NONINTEREST  INCOME

**  3,215**

 2,670	

**    8,418**

    9,062	

** **

** **

** **

**NONINTEREST  EXPENSE**

Salaries and employee benefits

**  4,050**

 3,807	

**  12,041**

 11,849	

** **

Net occupancy expense

**     595**

     583	

**    1,768**

    1,700	

** **

Furniture and equipment expense

**     305**

     303	

**        895**

       962	

** **

Other operating expenses

**  2,368**

 2,515	

**    7,505**

    7,725	

** **

      TOTAL NONINTEREST EXPENSE

**  7,318**

 7,208	

**  22,209**

 22,236	

** **

           INCOME BEFORE PROVISION FOR

** **

** **

** **

                 INCOME TAXES

**  3,366**

 2,775	

**    8,962**

    9,271	

** **

PROVISION FOR INCOME TAXES

**     916**

     859	

**    2,463**

    2,646	

** **

** **

** **

** **

** **

** **

** **

                  NET INCOME	

$

**  2,450**

 $	

 1,916	

 $ 

**    6,499**

 $ 

    6,625	

** **

** **

** **

** **

** **

** **

**Per Share Data**

Per Share Data (1)

** **

** **

                  (5,840,000 in 2005 and 2004)

$

**    0.42**

 $	

    0.33	

 $ 

**       1.11**

 $ 

      1.13	

Dividends Declared

$

**     -**

 $	

    -	

 $ 

**       0.31**

 $ 

      0.29	

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

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

 
 
**FIRST FARMERS AND  MERCHANTS CORPORATION AND SUBSIDIARY                **

**CONSOLIDATED  STATEMENTS OF CASH FLOWS                 **

**(Dollars In Thousands)**

**(Unaudited)**

Nine Months Ended September 30, 2005 and 2004

**2005**

2004

**OPERATING**

Net income

**$**

**6,499**

$

6,624

**ACTIVITIES**

   Adjustments to reconcile net income to net cash  provided

     by operating activities

       Deficiency of provision for possible loan losses

          over net charge offs

**(602)**

(1,372)

       Provision for depreciation and amortization of

          premises and equipment

**933**

908

       Amortization of deposit base intangibles

**792**

792

       Amortization of investment security premiums,

          net of accretion of discounts

**1,699**

2,096

       Securities gains

**(513)**

(917)

       Increase in cash surrender value of life insurance  contracts

**(203)**

(329)

       (Increase) decrease in

          Deferred income taxes

**(187)**

376

          Interest receivable

**36**

360

          Other assets

**382**

(852)

       Increase (decrease) in

          Interest payable

**524**

(105)

          Other liabilities

**2,254**

755

               Total adjustments

**5,115**

1,711

               Net cash provided by operating activities

**11,614**

8,336

**INVESTING**

Proceeds from maturities, calls and sales of

**ACTIVITIES**

      available-for-sale securities

**73,034**

29,956

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

**7,072**

18,872

Purchases of investment securities

      Available-for-sale

**(48,888)**

(27,588)

      Held-to-maturity

**(24,832)**

(16,609)

Net (increase) decrease in loans

**(7,938)**

(18,726)

Purchases of premises and equipment

**(540)**

(602)

Purchase of single premium life insurance contract

**(254)**

(253)

               Net cash provided by investing activities

**(2,346)**

(14,949)

**FINANCING**

Net increase (decrease) in noninterest-bearing

**ACTIVITIES**

      and interest-bearing deposits

**(2,470)**

3,529

Net increase (decrease)  in short-term borrowings

**(2,676)**

13,396

Cash dividends

**(3,562)**

(3,329)

               Net cash used in financing activities

**(8,708)**

13,596

Increase in cash and cash equivalents

**560**

6,983

Cash and cash equivalents at beginning of period

**22,251**

38,434

Cash and cash equivalents at end of period

**$**

**22,811**

$

45,417

      The accompanying notes are an integral part of theconsolidated 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 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.  Forfurther information, refer to the consolidated financial statements and notesincluded in the annual report of First Farmers and Merchants Corporation (the"Corporation") on 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 andnotes have been restated to give retroactive effect to this dividend.

**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**

    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 repayment of loans by borrowers,migration of loans to more severe classifications, failure to meet andsatisfaction of capital adequacy requirements, material capital expenditures, theeffect of fluctuating interest rates, deferred income tax assets and rate riskanalysis.  We caution you not to place undue reliance on such forward-lookingstatements in this report because results could differ materially from those anticipateddue to a variety of factors.  These factors include, but are not limited to,changes in economic conditions; fluctuations in prevailing interest rates andthe effectiveness of our risk monitoring systems; the ability of our borrowersto repay loans; adverse changes in our special mention credits; our ability tosell available-for-sale securities to fund increased loan demand; our abilityto meet 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; the geographicconcentration of our assets; out ability to maintain sufficient asset qualityand cost controls; and other factors generally understood to affect thefinancial results of financial services companies. We undertake no obligationto update these forward-looking statements to reflect events or circumstancesthat occur after the date of this report.

**EXECUTIVE OVERVIEW**

AtSeptember 30, 2005, the consolidated total assets of First Farmers and MerchantsCorporation (the "Corporation") were $813.33 million, its consolidated netloans were $449.08 million, its total deposits were $691.39 million, and itstotal shareholders' equity was $107.15 million.  The loan portfolio at September 30,2005, increased $8.54 million or 1.9% compared to December 31, 2004.  Theretail portion of the portfolio experienced a 2.0% increase for the first ninemonths of 2005 and the commercial portfolio increased 1.6% over the sameperiod.  Total deposits decreased $2.47 million or 0.36% and shareholders'equity increased 2.8% during the first nine months of 2005.  Shareholders'equity, not including accumulated other comprehensive income, increased 4.5% inthe first nine months of 2005.  Total shareholders' equity includes anunrealized loss on available-for-sale securities of $1.17 million.

On July 5, 2005, the bankconverted to a state chartered bank.  This change has had no material financial consequences and we do not anticipate anyfuture material financial consequences.

**MATERIALCHANGES IN FINANCIAL CONDITION**

Averageearning assets for the three months ended September 30, 2005 were up from average earning assets at June30, 2005 but down from December 31, 2004.  Average overnight investments at September 30,2005 were down $1.7 million compared to June 30, 2005 and up $0.058 million comparedto December 31, 2004.  Average investment securities at September 30,2005 were down 5.8% compared to the average at December 31, 2004.  Averagetotal assets of $819 million at September 30, 2005 decreased compared to an average of $825million at December 31, 2004.

**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 September 30, 2005, the Bank's investment securities portfoliohad $198.7 million available-for-sale securities and $93.9 millionheld-to-maturity securities compared to $226.8 million and $76.3 million,respectively, at December 31, 2004.  The 12.4% decrease in available-for-salesecurities for the nine months ended September 30, 2005 resulted from investing in the loanportfolio or held-to-maturity securities funds received as securities matured. The Bank may sell available-for-sale securities to fund planned increased loandemand as needed.  The 23.1% increase in the investment in held-to-maturitysecurities was a result of a strategy to increase the investment in municipalsecurities with a maturity of fifteen to seventeen years to shelter taxableincome and improve income, as loan volume 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 47.5% of the total loan portfolio atSeptember 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 32.6% ofthe portfolio at September 30, 2005 and have a higher level of risk andhistorical loss experience than residential mortgage loans.  There is not anindustry concentration as measured by regulatory guidelines.  However, the Bankcurrently has 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 theBank's Board of Directors.  This evaluation supported a reversal of specificallocations in the allowance during the first and third quarter of 2005 as aresult of the resolution of certain problem loans associated with thosespecific allocations.  Credit quality continued to improve during the secondquarter as indicated by declines in the volume of loans with past due paymentsand potential problem loans.  The allowance for possible loan and lease losseswas $7.9 million, or 1.7% of gross loans, at September 30, 2005.  Thiscompares to $8.5 million, or 1.9% at December 31, 2004.  Net recoveries throughSeptember 30, 2005 were $697,500 which results in an annualized net charge-offratio of (-0.09%).

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 September 30, 2005, this process identified loans totaling $10.4million, or 2.3% of the portfolio, that were classified as other assets especiallymentioned.  This compares to loans totaling $6.7 million, 1.5 % of theportfolio, so classified at December 31, 2004.  The increase at September 30,2005 warrants close attention; however, information regarding the two largecredits accounting for most of the increase leads management to anticipate nosignificant migration of these loans to more severely classified levels.  Loanstotaling $6.2 million, or 1.4% of the portfolio, were classified as substandardat September 30, 2005, compared to loans totaling $11.2 million, or2.5% of the portfolio, so classified at December 31, 2004.  Loans totaling $0.7million, or 0.2% of the portfolio, were classified as doubtful at September 30,2005, compared to $1.0 million, or 0.2% of the portfolio, so classified at December31, 2004.  This reduction occurred through the continued amortization on oneterm debt, which is the only credit rated doubtful loan in the portfolio.  Loanshaving recorded investments of $2.9 million, or 0.6% of the total portfolio,were identified as impaired at September 30, 2005 compared to $5.5 million, or 1.2% of theportfolio, at December 31, 2004.  

Duringthe third quarter of 2005, there were write downs totaling $4,000 of other realestate associated with declines in real estate values subsequent to foreclosureand disposition of the properties at less than their carrying value that werecharged 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 21 domestic offices. The Bank's average deposits declined 1.3% during the first nine months of 2005compared to a decline of 5.8% in the first nine months of 2004.  The primaryreason for the decrease in the decline of average deposits between theseperiods is that the Bank changed its strategy for pricing short-term largedollar certificates of deposit.  By being more aggressive in pricing thesedeposits in 2005 than in 2004, the decline in deposits has slowed.  Averagetotal noninterest-bearing deposits were 16.3% of total deposits at September 30,2005, 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 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 0 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 Tier 1 Capital ratio of at least 4%, a Total Capital ratio of at least 8%,and a leverage capital ratio of at least 4%.  As of September 30,2005, the Corporation's Tier 1, Total Capital and leverage capital ratios were18.7% and 11.2%, respectively.  The ratios were 18.5%, 19.8%, and 11.3%,respectively, at December 31, 2004.  For a bank to be "well-capitalized," theTier 1 Capital, Total Capital and leverage capital ratios must be at least 6%,10% and 5%, respectively.  As of September 30, 2005, the Bank's Tier 1 Capital, Total Capitaland leverage capital were 19.8%, 18.4%, and 11.9%, respectively. Management believes, as of September 30, 2005, that the Corporation and the Bank meet all capitaladequacy requirements 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 September 30, 2005 was $105,670 million, a 1.8% increase from the average atDecember 31, 2004.  As a result of the Bank's conversion from a national to astate-chartered bank during the third quarter, the Bank is now subject to Tennessee statutes and regulations that impose restrictions on the amount of dividends thatmay be declared by the Bank.  Furthermore, any dividend payments are subject tothe continuing ability of the Bank to maintain its compliance with minimumfederal regulatory capital requirements and to retain its characterizationunder federal regulations as a "well capitalized" institution. The Bank declareda $0.31 per share dividend in the second quarter of 2005.  Management believesthat the Corporation'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 Bank's Board ofDirectors.

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 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.

**Critical AccountingPolicies**

Theaccounting principles the Corporation 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 Corporation's managementhas made 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 Corporation'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) 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:
-  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.

**OFF-BALANCE SHEET 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 September 30, 2005 were $45.6million and $10.2 million, respectively.  These totals compare to $69.3 millionoutstanding loan commitments and $8.6 million stand-by letters of credit in thenormal course of business at June 30, 2005.  Loan commitments are agreements tolend to a customer as long as there is not a violation of any conditionestablished in the contract.  Stand-by letters of credit are conditionalcommitments issued by the Bank to guarantee the performance of a customer to athird party.  Those guarantees are primarily issued to support public andprivate borrowing arrangements, including commercial paper, bond financing andsimilar transactions.  The credit risk involved in issuing letters of credit isessentially the same as that involved in making a loan.

AtSeptember 30, 2005 andDecember 31, 2004, the Corporation and the Bank did not have any off-balancesheet arrangements other than commitments to extend credit and stand-by lettersof credit.

**MATERIAL CHANGES IN RESULTS OF OPERATIONS**

Totalinterest income for the first nine months of 2005 was $29.00 million comparedto $28.11 million for the first nine months of 2004.  Total interest income forthe three months ending September 30, 2005, was $9.96 million compared to $9.39 millionfor the three months ended September 30, 2004.  Interest and fees earned onloans and investments are the components of total interest income.  Interestand fees earned on loans increased 9.8% during the first nine months of 2005compared to the first nine months of 2004 and increased 11.5% during the threemonths ended September 30, 2005 compared to the three months ending September 30,2004, as a result of the increase in the volume of average loans.  Interestearned on investment securities and other investments decreased 9.7% during thefirst nine months of 2005 compared to the first nine months of 2004 anddecreased 5.4% for the three months ended September 30, 2005 compared to the three months ended September 30,2004, as a result of the reduced volume of investment securities and higheryielding investments maturing and being replaced with investments at loweryields.

            Total interestexpense in the first nine months of 2005 increased 12.7% compared to the first ninemonths of 2004 and increased 24.4% in the three months endedg September 30,2005, compared to the three months ended September 30, 2004.  As apolicy, budgeted financial goals are monitored on a monthly basis by theAsset/Liability Committee, which reviews the actual dollar change in net interestincome for different interest rate movements.  A negative dollar change in netinterest income for a 12 month period of lessthan 4.5% of net interest income given a three hundred basis point shiftin interest rates is considered an acceptable rate risk position.  The raterisk analysis for the 12 month period beginning September 1, 2005 and ending August 31, 2006 showed a worst-case potentialchange to net interest income of a negative 0.33%, or a decline in net interestincome of $96,800.

            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.  Externalfactors 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 September 30, 2005, September 30, 2004 and December, 31, 2004 was 4.18%, 4.12% and 4.13%, respectively.

            No additionswere made to the allowance for loan losses in the third quarter of 2005.  Acredit was taken as of February 28, 2005 and another as of August 30, 2005 inthe amounts of $796,000 and $94,000, respectively, based upon unexpected lossrecoveries and substantial reductions in the level of criticized assets duringthe month.

            Noninterestincome decreased 7.1% during the first nine months of 2005 compared to the firstnine months of 2004 and increased 20.4% in the three months ended September 30,2005, compared to the three months ended September 30, 2004.  The decrease during the first nine months resultedfrom a decline in the level of overdrawn account service fees.  The increaseduring the quarter ended September 30, 2005 resulted a $512,707 gain on thesale of Available for Sale securities in the Bank's portfolio. 

Noninterestexpenses, excluding the provision for possible loan losses, were 0.13% less inthe first nine months of 2005 than in the first nine months of 2004 and theywere 1.5% more in the quarter ended September 30, 2005, compared to the quarter ended September 30,2004.  Salaries and benefits expense wasup $243,000 thousand or 6.4% for the three months ended September 30, 2005compared to the same period in 2004 as a result of an increased number ofemployees and standard increases in salaries.

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 nine month period ended September 30, 2005 in the terms of these operating leases.

Netincome for the nine months ended September 30, 2005, was $6.50 million, compared to $6.63million for the nine months ended September 30, 2004.  Net income for the three months ended September 30,2005 was $2.45 million compared to $1.92 million for the three months ended September 30,2004.  Noninterest income for the three months of September 30,2005 included a gain on the sale of available-for-sale securities that contributedto the higher earnings for that period compared to the three months of September 30,2004.  

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

Duringthe nine months ended September 30, 2005, there wereno 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 third quarter of 2005 that has materially affected, or is reasonably likelyto materially affect, the Corporation's internal control over financial reporting.
****
** **

**PART II OTHER INFORMATION**

**Item 5.  OtherInformation**

            Patricia N.McClanahan retired as Chief Financial Officer of the Bank and Treasurer of theCorporation effective August 2, 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 among FirstFarmers and Merchants National Bank, First Farmers and Merchants Corporation,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.

            (b) Report onForm 8-K:

On July 26, 2005, theCorporation furnished a Current Report on Form 8-K, pursuant to Item 5, announcingthe retirement of Patricia N. McClanahan as Chief Financial Officer of FirstFarmers and Merchants Bank and Treasurer of First Farmers and MerchantsCorporation.  Patricia P. Moody will be serving as Chief Financial Officer ofFirst Farmers and Merchants Bank and Assistant Treasurer of First Farmers andMerchants Corporation. 

**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             November1, 2005                                                      /s/ T. RandyStevens                                 

                                                    T. Randy Stevens, President/Chief Executive Officer

Date             November1, 2005                                                     /s/ PatriciaP. Moody                                  

                Patricia P. Moody, ChiefFinancial Officer |