United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

**FORM 10-Q**

(Mark One)

[X] Quarterly report pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

      For the quarterlyperiod ended June 30, 2004

      or

[  ] Transition report pursuantto Section 13 or 15(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                                                                           |
|  (State or other jurisdiction of incorporation or  organization)               |
|                                                                                     |
| 62-1148660                                                                          |
| (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   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 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 August 2, 2004__

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PART 1 - FINANCIAL INFORMATION

**Item 1. FinancialStatements.**

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

Consolidatedbalance sheets - June 30, 2004, and December 31, 2003.

Consolidatedstatements of income - For the three months and six months ended June 30, 2004, and June 30, 2003.

Consolidatedstatements of cash flows - For the six months ended June 30, 2004, and June 30, 2003.

Selectednotes to consolidated financial statements.

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| FIRST FARMERS AND MERCHANTS CORPORATION AND  SUBSIDIARY                                |
|----------------------------------------------------------------------------------------|
| CONSOLIDATED BALANCE SHEETS                                                            |
|                                                                                        |  |  |  |  |  |
|                                                                                        |  |  |  |  |  |
|                                                                                        |  |  |  |  |  |
|                                                                                        | (Dollars in Thousands) |  | June 30, |  | December 31 |
|                                                                                        |  |  |  (Unaudited) |                      (1) |
| ASSETS                                                                                 | Cash and due from banks |  $ |           46,748 |  $ |               26,137 |
|                                                                                        | Interest-bearing deposits in banks |  |                298 |  |                    297 |
|                                                                                        | Federal funds sold |  |    - |  |               12,000 |
|                                                                                        |               Total cash and cash equivalents |  |           47,046 |  |               38,434 |
|                                                                                        | Securities |  |  |  |  |
|                                                                                        |     Available for sale (amortized cost $246,269 |  |  |  |  |
|                                                                                        |          and $243,038 respectively) |  |         246,458 |  |             249,653 |
|                                                                                        |     Held to maturity (fair value $86,330 |  |  |  |  |
|                                                                                        |          and $84,199 respectively) |  |           81,354 |  |               79,138 |
|                                                                                        |               Total securities |  |         327,812 |  |             328,791 |
|                                                                                        | Loans, net of deferred fees |  |         420,108 |  |             424,504 |
|                                                                                        |     Allowance for possible loan losses |  |            (8,764) |  |             (10,123) |
|                                                                                        |               Net loans |  |         411,344 |  |             414,381 |
|                                                                                        | Bank premises and equipment, at cost |  |  |  |  |
|                                                                                        |          less allowance for depreciation |  |           12,749 |  |               12,997 |
|                                                                                        | Core deposit and other intangibles |  |           12,515 |  |               13,042 |
|                                                                                        | Other assets |  |           24,150 |  |               21,168 |
|                                                                                        |             TOTAL ASSETS |  $ |         835,616 |  $ |             828,813 |
|                                                                                        |  |  |  |  |  |
| LIABILITIES                                                                            | Deposits |  |  |  |  |
|                                                                                        |      Noninterest-bearing |  $ |         132,153 |  $ |             112,334 |
|                                                                                        |      Interest-bearing (including certificates of  deposit |  |  |  |  |
|                                                                                        |           over $100,000:  2004 - $64,893; 2003 -  $71,968) |  |         579,663 |  |             604,099 |
|                                                                                        |             Total deposits |  |         711,816 |  |             716,433 |
|                                                                                        | Federal funds purchased and securities sold |  |  |  |  |
|                                                                                        |            under agreements to repurchase |  |           14,505 |  |                 1,820 |
|                                                                                        | Dividends payable |  |             1,694 |  |                 1,635 |
|                                                                                        | Other short term liabilities |  |                632 |  |                    648 |
|                                                                                        | Accounts payable and accrued liabilities |  |             5,616 |  |                 5,992 |
|                                                                                        |             TOTAL LIABILITIES |  |         734,263 |  |             726,528 |
|                                                                                        |  |  |  |  |  |
| 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 |  |           38,517 |  |               35,498 |
|                                                                                        | Accumulated other comprehensive income |  |                116 |  |                 4,067 |
|                                                                                        |             TOTAL SHAREHOLDERS' EQUITY |  |         101,353 |  |             102,285 |
|                                                                                        |  |  |  |  |  |
|                                                                                        |             TOTAL LIABILITIES AND |  |  |  |  |
|                                                                                        |                 SHAREHOLDERS' EQUITY |  $ |         835,616 |  $ |             828,813 |
|       (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, |  |
|                                                                                                                                           |  |  | 2004 |  | 2003 |  |  | 2004 |  | 2003 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
| INTEREST INCOME                                                                                                                           | Interest and fees on loans | $ | 5,825 | $ | 7,356 |  | $ | 11,875 | $ | 15,026 |  |
|                                                                                                                                           | Income on investment securities |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |      Taxable interest |  | 2,664 |  | 2,767 |  |  | 5,374 |  | 5,643 |  |
|                                                                                                                                           |      Exempt from federal income tax |  | 631 |  | 716 |  |  | 1,256 |  | 1,462 |  |
|                                                                                                                                           |      Dividends |  | 128 |  | 50 |  |  | 155 |  | 75 |  |
|                                                                                                                                           |  |  | 3,423 |  | 3,533 |  |  | 6,785 |  | 7,180 |  |
|                                                                                                                                           | Other interest income |  | 26 |  | 51 |  |  | 56 |  | 129 |  |
|                                                                                                                                           |     TOTAL INTEREST INCOME |  | 9,274 |  | 10,940 |  |  | 18,716 |  | 22,335 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
| INTEREST EXPENSE                                                                                                                          | Interest on deposits |  | 2,060 |  | 2,992 |  |  | 4,246 |  | 6,296 |  |
|                                                                                                                                           | Interest on other short term borrowings |  | 8 |  | 8 |  |  | 11 |  | 15 |  |
|                                                                                                                                           |       TOTAL INTEREST EXPENSE |  | 2,068 |  | 3,000 |  |  | 4,257 |  | 6,311 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |             NET INTEREST INCOME |  | 7,206 |  | 7,940 |  |  | 14,459 |  | 16,024 |  |
|                                                                                                                                           | PROVISION FOR POSSIBLE LOAN LOSSES |  | (677) |  | 350 |  |  | (677) |  | 760 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |       NET INTEREST INCOME AFTER |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |            PROVISION FOR LOAN LOSSES |  | 7,883 |  | 7,590 |  |  | 15,136 |  | 15,264 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
| NONINTEREST  INCOME                                                                                                                  | Trust department income |  | 534 |  | 442 |  |  | 1,057 |  | 909 |  |
|                                                                                                                                           | Service fees on deposit accounts |  | 1,868 |  | 1,814 |  |  | 3,581 |  | 3,588 |  |
|                                                                                                                                           | Other service fees, commissions, and fees |  | 113 |  | 134 |  |  | 210 |  | 230 |  |
|                                                                                                                                           | Other operating income |  | 228 |  | (89) |  |  | 628 |  | 149 |  |
|                                                                                                                                           | Securities gains |  |  - |  |  - |  |  | 917 |  |  - |  |
|                                                                                                                                           |       TOTAL NONINTEREST  INCOME |  | 2,743 |  | 2,301 |  |  | 6,393 |  | 4,876 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
| NONINTEREST  EXPENSES                                                                                                                | Salaries and employee benefits |  | 4,055 |  | 3,672 |  |  | 8,041 |  | 7,367 |  |
|                                                                                                                                           | Net occupancy expense |  | 545 |  | 527 |  |  | 1,118 |  | 1,027 |  |
|                                                                                                                                           | Furniture and equipment expense |  | 317 |  | 345 |  |  | 660 |  | 711 |  |
|                                                                                                                                           | Other operating expenses |  | 2,652 |  | 2,722 |  |  | 5,210 |  | 5,272 |  |
|                                                                                                                                           |       TOTAL NONINTEREST EXPENSES |  | 7,569 |  | 7,266 |  |  | 15,029 |  | 14,377 |  |
|                                                                                                                                           |            INCOME BEFORE PROVISION FOR |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |                  INCOME TAXES |  | 3,057 |  | 2,625 |  |  | 6,500 |  | 5,763 |  |
|                                                                                                                                           | PROVISION FOR INCOME TAXES |  | 805 |  | 820 |  |  | 1,787 |  | 1,494 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |                   NET INCOME | $ | 2,252 | $ | 1,805 |  | $ | 4,713 | $ | 4,269 |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |  |  |  |  |  |  |  |  |  |  |  |
| EARNINGS PER SHARE   (1)                                                                                                        | Common stock |  |  |  |  |  |  |  |  |  |  |
|                                                                                                                                           |       5,840,000 shares outstanding | $ | 0.39 | $ | 0.31 |  | $ | 0.81 | $ | 0.73 |  |
| (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) | Six Months Ended June 30, |
|                                                                                                                                                          |  |  | 2004 |  | 2003 |
|                                                                                                                                                          |  |  |  |  |  |
| OPERATING                                                                                                                                                |    Net income | $ |     4,713 |  $ |     4,269 |
| 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 |  |    (1,360) |  |           1 |
|                                                                                                                                                          |        Provision for depreciation and amortization of |  |  |  |  |
|                                                                                                                                                          |           premises and equipment |  |        604 |  |        682 |
|                                                                                                                                                          |        Amortization of deposit base intangibles |  |        528 |  |        696 |
|                                                                                                                                                          |        Amortization of investment security premiums, |  |  |  |  |
|                                                                                                                                                          |           net of accretion of discounts |  |     1,392 |  |     1,272 |
|                                                                                                                                                          |        Securities gains |  |       (917) |  | - |
|                                                                                                                                                          |        Increase in cash surrender value of life  insurance contracts |  |       (219) |  |       (219) |
|                                                                                                                                                          |        (Increase) decrease in |  |  |  |  |
|                                                                                                                                                          |               Deferred income taxes |  |        496 |  |       (190) |
|                                                                                                                                                          |               Interest receivable |  |        198 |  |        507 |
|                                                                                                                                                          |               Other assets |  |       (728) |  |    (1,424) |
|                                                                                                                                                          |        Increase (decrease) in |  |  |  |  |
|                                                                                                                                                          |           Interest payable |  |        (52) |  |       (134) |
|                                                                                                                                                          |           Other liabilities |  |       (322) |  |       (838) |
|                                                                                                                                                          |                Total Adjustments |  |       (381) |  |        353 |
|                                                                                                                                                          |                Net cash provided by operating  activities |  |     4,332 |  |     4,622 |
|                                                                                                                                                          |  |  |  |  |  |
| INVESTING                                                                                                                                                |    Proceeds from maturities, calls, and sales of |  |  |  |  |
| ACTIVITIES                                                                                                                                               |       available-for-sale securities |  |  23,872 |  |  22,161 |
|                                                                                                                                                          |    Proceeds from maturities and calls of  held-to-maturity securities |  |  10,473 |  |  19,058 |
|                                                                                                                                                          |    Purchases of investment securities |  |  |  |  |
|                                                                                                                                                          |       Available-for-sale |  |  (27,537) |  |  (52,586) |
|                                                                                                                                                          |       Held-to-maturity |  |  (12,732) |  | - |
|                                                                                                                                                          |    Net decrease in loans |  |     4,396 |  |  42,990 |
|                                                                                                                                                          |    Purchases of premises and equipment |  |       (355) |  |       (361) |
|                                                                                                                                                          |    Purchase of single premium life insurance  contracts |  |       (253) |  |       (190) |
|                                                                                                                                                          |                Net cash provided by (used by)  investing activities |  |    (2,136) |  |  31,072 |
|                                                                                                                                                          |  |  |  |  |  |
| FINANCING                                                                                                                                                |    |  |  |  |  |
| ACTIVITIES                                                                                                                                               |         Net decrease	in noninterest-bearing and  interest-bearing deposits |  |    (4,617) |  |  (36,092) |
|                                                                                                                                                          |    Net increase (decrease) in short term borrowings |  |  12,668 |  |       (366) |
|                                                                                                                                                          |    Cash dividends |  |    (1,635) |  |    (1,577) |
|                                                                                                                                                          |                Net cash provided by (used by)  financing activities |  |     6,416 |  |  (38,035) |
|                                                                                                                                                          |  |  |  |  |  |
|                                                                                                                                                          |                Increase (decrease) in cash and cash  equivalents |  |     8,612 |  |    (2,341) |
|                                                                                                                                                          |                Cash and cash equivalents at beginning  of period |  |  38,434 |  |  51,701 |
|                                                                                                                                                          |                Cash and cash equivalents at end of  period | $ |  47,046 |  $ |  49,360 |
|       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 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 notes includedin the Corporation's annual report on Form 10-K for the year ended December 31,2003.

**NOTE 2 - TERMINATION OFOCC AGREEMENT**

OnSeptember 3, 2002, First Farmers and Merchants National Bank, the wholly-ownedsubsidiary (the "Bank") of First Farmers and Merchants Corporation(the "Corporation"), voluntarily entered into a written agreementwith the Office of the Comptroller of the Currency (the "OCC").  Theagreement related to asset quality and management and board oversight of thelending function.  Loan quality and management of the lending function improvedin 2003 as asset quality initiatives were put in place.  On April 12, 2004, theBank received written notice from the OCC that the agreement between the Bankand the OCC was terminated effective April 7, 2004.

**Note 3 - 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 recorded asa transfer from retained earnings to common stock in the amount of $29,200,000($10 for each additional share issued).  All per share and share data in theaccompanying consolidated financial statements and footnotes have been restatedto give retroactive effect to this transaction.

 

**Item 2.  Management's Discussion and Analysis ofFinancial 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 "believes," "expects," "may," "will,""pro forma" or "anticipates," or the negatives of suchterms.  We caution you not to place undue reliance on such forward-lookingstatements in this report because results could differ materially from thoseanticipated due to a variety of factors.  These factors include, but are not limitedto, changes in economic conditions; fluctuations in prevailing interest ratesand the effectiveness of our risk monitoring systems; our ability to repricerate-sensitive earning assets and interest-bearing liabilities; 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 maintain credit quality; our ability to provide marketcompetitive products and services; laws and regulations affecting financialinstitutions in general; and other factors generally understood to affect thefinancial results of financial services companies. 

**EXECUTIVE OVERVIEW**

AtJune 30, 2004, the Corporation's consolidated total assets were $835,616,000,its consolidated net loans were $411,344,000, its total deposits were $711,816,000,and its total shareholders' equity was $101,353,000.  During recent quarters, theBank had experienced a decline in loan demand as a result of a slow localeconomy, evidenced by the closing of manufacturing plants and light commercialand industrial activity, and Bank credit quality initiatives.  Loan demand improvedin the second quarter as local economic conditions strengthened and new loanproducts and marketing efforts were introduced.  Total deposits declined as aresult of a Bank Asset/Liability Committee strategy to be less aggressive inbidding for short-term large dollar certificates of deposit.  Averageshareholders' equity increased 0.65% compared to average shareholders' equity forthe year ended December 31, 2003.

**MATERIAL CHANGES IN FINANCIAL CONDITION**

Averageearning assets for the six months ended June 30, 2004 were down 4.6% fromaverage earning assets at December 31, 2003.  Lower loan volume in the firstquarter reduced the six months average, but as loan volume improved in thesecond quarter, overnight investment of excess funds declined.  At June 30,2004, average net loans had decreased 8.1% compared to December 31, 2003, whichis lower than the decrease in average net loansat June 30, 2003 of 10.0%.  Average overnight investments were down $11,752,000or 51.3% at June 30, 2004 compared to December 31, 2003.  Average investment securitiesincreased 5.6% compared to the average at December 31, 2003.  Average totalassets of $826 million at June 30, 2004 decreased 4.8% compared to $867 millionat December 31, 2003.

**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 Bank operating and tax plans, shifting yield spreadrelationships, and changes in configuration of the yield curve.  At June 30,2004, the Bank's investment securities portfolio had $246.5 millionavailable-for-sale securities and $81.4 million held-to-maturity securities. There were $249.7 million available-for-sale securities and $79.1 millionheld-to-maturity securities at December 31, 2003.  The decrease inavailable-for-sale securities resulted from funding loans as the demandimproved.  The Bank may sell available-for-sale securities as funding for anticipatedincreased loan demand when needed.

**Loans**

Theloan portfolio is the largest component of earning assets for the Bank and,consequently, provides the highest amount of revenues.  The loan portfolio alsocontains, as a result of the possibility of unexpected deterioration in thecredit quality of borrowers, the highest exposure to risk in the Bank's earningassets.  When analyzing potential loans, management assesses both interest rateobjectives and credit quality objectives in determining whether to make a givenloan and the appropriate pricing for that loan.  The loan portfolio is welldiversified with loans generally secured by tangible personal property, realproperty, or stock.  The loans are expected to be repaid from cash flow orproceeds from the sale of selected assets of the borrowers.  Collateralrequirements for the loan portfolio are based on credit worthiness of eachborrower.  The analysis and review of asset quality by the Bank's creditadministration includes a formal review that evaluates the adequacy of theallowance for possible loan losses.  This review is updated monthly andevaluated more completely on a quarterly basis in conjunction with loan reviewreports and management asset quality reports that are discussed in meetingswith loan officers, loan administration, and a Board of Directors oversightcommittee.  This evaluation supported a reversal of specific allocations in theallowance during the second quarter of 2004 as a result of the resolution of certainproblem loans associated with those specific allocations.  Credit qualitycontinued to improve during the second quarter as indicated by declines in thevolume of loans with past due payments and lower volumes of potential problemloans.  The allowance for possible loan and lease losses was $8.8 million or 2.1%of gross loans at June 30, 2004.  This compares to $10.1 million or 2.4% atDecember 31, 2003.  Net charge-offs for the first half of 2004 were $682,000,an annualized net charge-off ratio of 0.32%.  This volume of net charge offswas down from net charge-offs for the first half of 2003 which were $759,000,an annualized net charge-off ratio of 0.33%.  This improvement is another resultof credit quality improvements and effective procedures for addressing problemloans.

Managementhas developed a process to provide control over underwriting of loans andmonitor their collectibility.  This process includes education and training of lendingpersonnel on the Bank's loan policies and procedures, credit analysts tosupport lenders in credit underwriting, timely identification of loans withadverse characteristics and control of corrective actions, and objectivemonitoring of loan reviews.  A Special Assets Department of the Bank identifiesand monitors assets that need attention.  This process identified loanstotaling $7.9 million, or 1.9% of the portfolio, at June 30, 2004 that wereclassified as other assets especially mentioned.  This compares to loanstotaling $10.8 million, 2.5% of the portfolio, so classified at December 31,2003, and $9.8 million, 2.1% of the portfolio, so classified at June 30, 2003. Loans totaling $18.5 million, 4.4% of the portfolio, were classified assubstandard at June 30, 2004.  This compares to loans totaling $22.0 million,5.2% of the portfolio, so classified at December 31, 2003 and $32.5 million,7.1% of the portfolio, so classified at June 30, 2003.  Loans totaling $0.7million or 0.02% of the portfolio were classified as doubtful at June 30,2004.  This compares to $1.9 million, 0.5% of the portfolio, so classified atDecember 31, 2003, and $2.4 million, 0.5% of the portfolio, so classified at June30, 2003.  Loans having recorded investments of $6.9 million, or 1.6% of thetotal portfolio, were identified as impaired at June 30, 2004 compared to $11.9million at December 31, 2003, and $10.9 million at June 30, 2003.  Thesedeclines are a result of improved control over underwriting of loans, earlydetection of developing problem loans, and effective procedures for addressingproblem loans.

There were write downs of other real estate associated withdeclines in real estate values subsequent to foreclosure and disposition of theproperties at less than their carrying value during the first six months of2004 that were charged to current income.  The carrying value of other realestate is included in other assets on the balance sheet and represents realestate acquired through foreclosure and is stated at the lower of cost or fairvalue minus cost to sell.  An allowance for other real estate owned is not maintained. Any decreases or losses associated with the properties have been charged tocurrent income.  Management evaluates properties included in this category on aregular basis.  The carrying value for otherreal estate at June 30, 2004, December 31, 2003, and June 30, 2003, totaled $1.2 million, $1.6 million, and $1.8 million,respectively.  This decrease is another result of effective procedures foraddressing problem loans.

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 loan commitmentsand stand-by letters of credit in the normal course of business at June 30,2004, and December 31, 2003, were $63 million and $6 million and $64 millionand $7 million, respectively.  Loan commitments are agreements to lend to acustomer provided there is not a violation of any condition established in thecontract.  Standby letters of credit are conditional commitments issued by theBank 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.

**Deposits**

            The Bank doesnot have any foreign offices and all deposits are serviced in its twentydomestic offices.  The Bank's average deposits declined 5.6% during the first sixmonths of 2004 compared to a decline of 1.8% in the first six months of 2003. The primary reason for this decrease is a Bank Asset/Liability Committeestrategy to be less aggressive in bidding for short-term large dollarcertificates of deposit.  Average total noninterest-bearing deposits were 16.2%of total deposits at June 30, 2004 contributing to the Bank's low cost ofdeposits.  This compares to 14.2% at December 31, 2003 and 13.6% at June 30,2003.  This steady increase in noninterest-bearing deposits reflects thestrength of the Bank's core deposit base and improving local economicconditions.

**Regulatory Requirementsfor 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 actionsby regulators that could have an adverse material effect on the consolidatedfinancial statements of the Corporation and its subsidiary, the Bank.  Theregulations require the Bank to meet specific capital adequacy guidelines thatinvolve quantitative measures of assets, liabilities, and certain off-balance sheetitems as calculated under regulatory accounting practices.  The capitalclassification is also subject to qualitative judgments by the regulators aboutcomponents, 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) are 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 for possibleloan losses.  As of June 30, 2004, the Corporation's total risk-based and corecapital ratios were 20.1% and 18.9%, respectively.  The comparable ratios were18.7% and 17.5% at December 31, 2003.  As of June 30, 2004, the Bank's totalrisk-based and core capital ratios were 19.6% and 18.3%, respectively.  Thecomparable ratios were 18.5% and 17.2% at December 31, 2003.  As of June 30,2004, the Corporation and the Bank had a ratio of core capital to average totalassets of 11.2% and 10.8%, respectively, compared to 10.3% and 10.2% atDecember 31, 2003.  Capital ratios for the Corporation and the Bank aredifferent because of different dividend payments and additional assets held bythe Corporation.  Management believes, as of June 30, 2004, that theCorporation and the Bank meet all capital adequacy requirements to which theyare subject.

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

            Most of thecapital needs of the Bank have historically been financed with retainedearnings and deposit gathering 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 major plans for capitalexpenditures in the near future.  The Corporation's average shareholders'equity at June 30, 2004 was $103.4 million, a 0.7% increase from December 31,2003.  The approval of the OCC is required before the Bank's dividends in agiven year may exceed the total of its net profit (as defined by the OCC) forthe year, combined with retained net profits of the preceding two years.  As ofJune 30, 2004, the Bank could have declared additional dividends ofapproximately $13.7 million without regulatory agency approval.  The Bankdeclared a $0.29 per share dividend in the second quarter of 2004.  Managementbelieves that the Corporation's traditional sources of cash generated fromoperating activities are adequate to meet the Corporation's liquidity needs fornormal ongoing operations.

            The Bankmaintains a formal asset and liability management process to control interestrate risk and assist management in maintaining reasonable stability in thegross 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.  A negative dollar change in netinterest income for a twelve-month period ofless than 4.5% of net interest income given a three hundred basis pointshift in interest rates is considered an acceptable rate risk position.  Therate risk analysis for the twelve-month period beginning July 1, 2004 andending June 30, 2005 showed a worst-case potential change to net interest incomeof a negative 1.8%, or a decline in net interest income of $553,000.

**Critical Accounting Policies**

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, Bank management has madejudgments and estimates which, 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 having weak or decliningcredit quality characteristics.  These loans are generally in two differentrisk groups.  One group is unique loans (commercial loans, including thoseloans considered impaired).  The second group is homogenous loans (generallyretail loans).  The calculation for unique loans is based primarily on riskrating grades assigned to each of these loans as a result of our underwritingand ongoing review processes.  Each risk-rating grade for unique criticizedloans is assigned a loss ratio, which is determined based on the experience ofmanagement, discussions with banking regulators, and the independent loanreview process.  The allocation for the remaining balance of unique loans isbased on historical loss experience.  The amount allocated for impaired loansis based on estimated cash flows discounted at the loan's original effectiveinterest rate or the underlying collateral value.  Historical data, includingactual loss experience on specific types of homogenous loans, is used toallocate amounts for loans or groups of loans meeting the specified criteria. More detailed historical data regarding the performance characteristics ofretail and commercial loans is being accumulated to broaden the analysis and improvethe monitoring of potential risk.

           Criteriaconsidered in evaluating the adequacy of the ALLL are:

> 
  *Portfolioquality trends;

*Changesin the nature and volume of the portfolio;

*Presentand prospective economic and business conditions, locally and nationally;

*Managementreview systems and board oversight, including external loan review processes;

*Changesin credit policy, credit administration, portfolio management and procedures;and

*Changesin 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 Tax Assets**

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.  During the second quarter of 2004, the tax effect of excess provisionsfor loan losses over actual losses incurred declined as specific allocationsassociated with the resolution of certain problem loans, discussed earlier,were reversed.  The tax effect of unrealized gains on available-for-salesecurities decreased as the market value of investment securities was less thanthe market value at December 31, 2003.  This decline reduced the deferredincome tax liability associated with such gains and net deferred income taxassets increased.

**Off-Balance Sheet Arrangements**

            As of June 30,2004, the Corporation and the Bank did not have any off-balance sheetarrangements.  This was also the case at December 31, 2003.

**MATERIAL CHANGES IN RESULTS OF OPERATIONS**

Totalinterest income of $18.7 million for the six months ended June 30, 2004, was16.2% lower than the total interest income of $22.3 million for the six monthsended June 30, 2003.  Interest and fees earned on loans and investments are thecomponents of total interest income.  Interest and fees earned on loansdecreased 21.0% during the first six months of 2004 as compared to the sameperiod of 2003 as a result of the decrease in the volume of average loans and reducedinterest rates.  Interest earned on investment securities and other investmentsdecreased 6.4% during the first half of 2004 compared to the first half of 2003as a result of reduced interest rates.

            Total interestexpense of $4.3 million for the six months ended June 30, 2004 decreased 32.6% comparedto the six months ended June 30, 2003 as a result of the decrease in the volumeof average deposits and reduced interest rates.  Asa policy, budgeted financial goals are monitored on a monthly basis by the Bank'sAsset/Liability Committee who reviews the actual dollar change in net interestincome given different interest rate movements.

            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, 2004, December 31, 2003, and June 30, 2003was 4.06%, 4.21%, and 4.24%, respectively.

            There was a $677,000reversal of specific allocations in the allowance for loan and lease lossesduring the second quarter of 2004 as a result of the resolution of certainloans associated with the specific allowances.  This compares to an addition of$350,000 to the allowance during the second quarter of 2003.  While the Bank'scredit quality has improved, continued improvement is ongoing to achieve certaintargeted credit quality goals.  This coupled with continued economicuncertainity supported the current level of the allowance at June 30, 2004.

            Noninterestincome, not including a gain on the sale of available-for-sale securities of$917,000 and a gain on the sale of assets of $314,000, increased 5.9% duringthe first half of 2004 compared to the first half of 2003.  This increaseresulted from:

(1)   Income from fiduciary services provided in the Bank's trustdepartment which was up 16.2% compared to the first half of 2003 andrepresented approximately 16.5% of noninterest income; and

(2)   Service fees, approximately 56% ofnoninterest income which were down 0.2% compared to the first half of 2003offsetting part of the increase in trust services income.

Noninterestexpenses, excluding the provision for possible loan losses, were 4.5% more inthe first half of 2004 than in the first half of 2003.  Salaries and benefitsexpense was up 9.2% compared to the first half of 2003 as a result of anincreased number of employees and standard increases in salaries.

Netincome for the six months ended June 30, 2004 was $4.7 million compared to $4.3million for the six months ended June 30, 2003.  This was $0.42 earnings pershare for the first quarter and $0.39 earnings per share for the second quarterof 2004.  This compares to $0.42 earnings per share for the first quarter and $0.31per share for the second quarter of 2003.

TheCorporation and the Bank do not have any long-term debt or other contractualobligations, with the exception of certain operating leases.  There has notbeen a change in these operating leases.

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk.**

Duringthe quarters ended March 31, 2004 and June 30, 2004, there were no material changesin the quantitative and qualitative disclosures about market risk presented inthe Corporation's Annual Report on Form 10-K for the year ended December 31,2003. 

**Item 4. Controls and Procedures.**

(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 Financial Officer,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 during thequarter ending June 30, 2004 that has materially affected, or is reasonablylikely to materially affect, the Corporation's internal control over financialreporting.

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PART II - OTHER INFORMATION

**Item 2.  Changes inSecurities, Use of Proceeds, and Issuer Purchases of Equity Secutities.**

** **

            At the Annual Shareholders' Meeting on April 20, 2004,the Corporation 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 additional share issued).  All per share and sharedata in the accompanying consolidated financial statements and footnotes havebeen restated to give retroactive effect to this transaction.

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

** **

            The annual meeting for shareholders of theCorporation was held on Tuesday, April 20, 2004.  At the meeting, the electionof directors was voted upon by the Corporation's shareholders.  At the meeting,votes were cast as follows:

                                                                        

|                          |  Votes In  |  Votes                                                           |  Votes                                                     |
|--------------------------|-----------------|----------------------------------------------------------------------------|----------------------------------------------------------------------|
|                          |  Favor     |  Abstained                                                            |  Against                                                        |
| Kenneth A. Abercrombie   |  1,941,193 |              - |         200                       |
| James L. Bailey, Jr.     |  1,941,253 |              - |         140                       |
| Hulet M. Chaney          |  1,941,393 |              - |             - |
| H. Terry Cook, Jr.       |  1,941,193 |              - |         200                       |
| Tom Napier Gordon        |  1,914,461 |              - |     26,932                                            |
| Dr. O. Rebecca Hawkins   |  1,941,393 |              - |             - |
| Waymon L. Hickman        |  1,941,393 |              - |             - |
| Dr. Joseph W. Remke, III |  1,941,053 |              - |         340                       |
| T. Randy Stevens         |  1,941,805 |              - |      2,588                                       |
| John P. Tomlinson, III   |  1,941,805 |              - |      2,588                                       |
| William R. Walter        |  1,941,393 |              - |             - |
| Dan C. Wheeler           |  1,941,193 |              - |         200                       |
| Dr. David S.Williams     |  1,941,341 |              - |      1,052                                       |
| W. Donald Wright         |  1,941,393 |              - |             - |

            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, WaymonL. Hickman, Dr. Joseph W. Remke, III, T. Randy Stevens, John P. Tomlinson, III,William R. Walter, Dan C. Wheeler, Dr. David S. Williams, and W. Donald Wrightwere elected as directors of the Corporation.  The terms of thedirectors will expire at the annual meeting of shareholders in 2005, but not beforetheir respective successors are elected and qualified.

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**Item 6.  Exhibits andReports on Form 8-K.**

(a)List of 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 of SpecimenStock Certificate. (a)

31.1      Certification ofthe Chief Executive Officer of First Farmers and Merchants Corporation Pursuantto Rule 13a-14(1) of the Securities Exchange Act of 1934, as amended, asAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2      Certification ofthe Chief Financial Officer of First Farmers and Merchants Corporation Pursuantto Rule 13a-14(1) of the Securities Exchange Act of 1934, as amended, asAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1      Certification ofthe Chief Executive Officer and Chief Financial Officer of First Farmers andMerchants Corporation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-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, File Number 0-10972, as filedwith the Securities and 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, File Number 0-10972.

(b)Reports on Form 8-K:

1.    OnApril 16, 2004, the Corporation furnished a Current Report on Form 8-K,pursuant to Item 5, announcing that the Bank received written notice from theOffice of the Comptroller of the Currency (the "OCC") that the agreementbetween the Bank and the OCC, dated September 3, 2002, was terminated effectiveApril 7, 2004.

2.    On April 21, 2004, the Corporation furnished a CurrentReport on Form 8-K, pursuant to Item 12, announcing its financial results forthe quarter ended March 31, 2004.

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SIGNATURES

     Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

|   |                |    | FIRST FARMERS AND MERCHANTS CORPORATION                    |
|--------|----------------|----|------------------------------------------------------------|
|   |                |    | (Registrant)                                               |
|   |                |    |                                                            |
| Date   | August 5, 2004 | By | /s/ T. Randy Stevens                                       |
|        |                |    | T. Randy Stevens, President/Chief Executive Officer        |
|        |                |    |                                                            |
| Date   | August 5, 2004 | By | /s/ Patricia N. McClanahan                                 |
|   |                |    | Patricia N. McClanahan, Treasurer/Chief Financial  Officer |