UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 FORM
10-Q
 
 x
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended September 30, 2010Or ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934
 For the
transition period from __________ to __________
 
 Commission
File Number 000-09424
 
 FIRST M&F
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 MISSISSIPPI
                    64-0636653(State
      or other jurisdiction of
                    (I.R.S.
      Employer Identification Number)Incorporation
      or organization)134 West Washington Street,  Kosciusko,
      Mississippi
                    39090(Address
      of principal executive offices)
                    (Zip
      Code)
 
 662-289-5121
 (Registrant’s
telephone number, including area code)
 
 No
Change
 (Former
name, former address and former fiscal year,
 if
changed since the last report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 x
Yes    ̈ No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 
  ̈
Yes    ̈ No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
 
 Large
      accelerated filer  ̈
                Accelerated
      filer   ̈Non-accelerated
      filer   ̈  (Do not check if a smaller
      reporting company)
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  ̈
Yes   x No
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Common stock, $5 par value
                    
                    9,097,552 SharesTitle
      of Class
                    
                    Shares
      Outstanding at October 31,
2010
  
  FIRST
M & F CORPORATION
 
 FORM
10-Q
 
 INDEX
 
 PagePART
      1:
                        
                        FINANCIAL
      INFORMATIONItem
      1
                        
                        Financial
      Statements (unaudited):
                        
                        3Consolidated
      Statements of Condition
                        
                        3Consolidated
      Statements of Operations
                        
                        4Consolidated
      Statements of Comprehensive Income
                        
                        5Consolidated
      Statements of Stockholders’ Equity
                        
                        6Consolidated
      Statements of Cash Flows
                        
                        7Notes
      to Consolidated Financial Statements
                        
                        9Item
      2
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                        
                        33Item
      3
                        
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        64Item
      4
                        
                        Controls
      and Procedures
                        
                        64PART
      II:
                        
                        OTHER
      INFORMATIONItem
      1
                        
                        Legal
      Proceedings
                        
                        65Item
      1A
                        
                        Risk
      Factors
                        
                        65Item
      2
                        
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        65Item
      3
                        
                        Defaults
      upon Senior Securities
                        
                        65Item
      4
                        
                        (Removed
      and Reserved)Item
      5
                        
                        Other
      Information
                        
                        65Item
      6
                        
                        Exhibits
                        
                        66SIGNATURES
                        
                        
                        
                        67EXHIBIT
      INDEX
                        
                        
                        
                        68CERTIFICATIONS
  2
  FIRST M
& F CORPORATION AND SUBSIDIARY
 
 PART
I: FINANCIAL INFORMATION
 Item
1 – Financial Statements (Unaudited)
 Consolidated
Statements of Condition
 (Dollars in thousands)
 September 30
                          
                          
                          December 312010
                          
                          
                          2009
                          
                          
                          2009(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Note 1)AssetsCash
      and due from banks
                          
                          $
                          36,232
                          
                          
                          $
                          38,809
                          
                          
                          $
                          42,446Interest
      bearing bank balances
                          
                          
                          32,904
                          
                          
                          
                          57,934
                          
                          
                          
                          84,810Federal
      funds sold
                          
                          
                          25,000
                          
                          
                          
                          50,000
                          
                          
                          
                          70,000Securities
      available for sale, amortized cost of $265,788, $296,828 and
      $280,470
                          
                          
                          272,467
                          
                          
                          
                          303,305
                          
                          
                          
                          284,550Loans
      held for sale
                          
                          
                          3,893
                          
                          
                          
                          6,726
                          
                          
                          
                          10,266Loans,
      net of unearned income
                          
                          
                          1,047,013
                          
                          
                          
                          1,099,108
                          
                          
                          
                          1,058,340Allowance
      for loan losses
                          
                          
                          (20,077
                          )
                          
                          
                          (32,695
                          )
                          
                          
                          (24,014
                          )Net
      loans
                          
                          
                          1,026,936
                          
                          
                          
                          1,066,413
                          
                          
                          
                          1,034,326Bank
      premises and equipment
                          
                          
                          41,143
                          
                          
                          
                          43,574
                          
                          
                          
                          42,919Accrued
      interest receivable
                          
                          
                          6,617
                          
                          
                          
                          8,280
                          
                          
                          
                          7,598Other
      real estate
                          
                          
                          38,631
                          
                          
                          
                          28,114
                          
                          
                          
                          23,578Goodwill
                          
                          
                          -
                          
                          
                          
                          16,772
                          
                          
                          
                          -Other
      intangible assets
                          
                          
                          5,119
                          
                          
                          
                          5,546
                          
                          
                          
                          5,439Bank
      owned life insurance
                          
                          
                          21,595
                          
                          
                          
                          20,895
                          
                          
                          
                          21,082Other
      assets
                          
                          
                          36,098
                          
                          
                          
                          30,101
                          
                          
                          
                          35,954$
                          1,546,635
                          
                          
                          $
                          1,676,469
                          
                          
                          $
                          1,662,968Liabilities and Stockholders’
      EquityLiabilities:Noninterest-bearing
      deposits
                          
                          $
                          220,556
                          
                          
                          $
                          196,999
                          
                          
                          $
                          228,579Interest-bearing
      deposits
                          
                          
                          1,101,323
                          
                          
                          
                          1,159,818
                          
                          
                          
                          1,159,684Total
      deposits
                          
                          
                          1,321,879
                          
                          
                          
                          1,356,817
                          
                          
                          
                          1,388,263Federal
      funds purchased and repurchase agreements
                          
                          
                          25,685
                          
                          
                          
                          12,164
                          
                          
                          
                          8,642Other
      borrowings
                          
                          
                          50,141
                          
                          
                          
                          133,751
                          
                          
                          
                          122,510Junior
      subordinated debt
                          
                          
                          30,928
                          
                          
                          
                          30,928
                          
                          
                          
                          30,928Accrued
      interest payable
                          
                          
                          1,554
                          
                          
                          
                          2,973
                          
                          
                          
                          2,933Other
      liabilities
                          
                          
                          7,691
                          
                          
                          
                          6,086
                          
                          
                          
                          5,062Total
      liabilities
                          
                          
                          1,437,878
                          
                          
                          
                          1,542,719
                          
                          
                          
                          1,558,338Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Class
      B; 1,000,000 shares authorized;Series
      A; 30,000 shares issued
                          
                          
                          -
                          
                          
                          
                          28,778
                          
                          
                          
                          28,838Series
      CD; 30,000 shares issued
                          
                          
                          16,164
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      stock of $5.00 par value; 50,000,000 shares authorized: 9,097,552,
      9,069,346 and 9,069,346 shares issued
                          
                          
                          45,488
                          
                          
                          
                          45,347
                          
                          
                          
                          45,347Additional
      paid-in capital
                          
                          
                          31,893
                          
                          
                          
                          31,922
                          
                          
                          
                          31,926Nonvested
      restricted stock awards
                          
                          
                          756
                          
                          
                          
                          765
                          
                          
                          
                          734Retained
      earnings (deficit)
                          
                          
                          12,050
                          
                          
                          
                          25,242
                          
                          
                          
                          (2,595
                          )Accumulated
      other comprehensive income
                          
                          
                          2,406
                          
                          
                          
                          1,695
                          
                          
                          
                          379First
      M&F Corporation equity
                          
                          
                          108,757
                          
                          
                          
                          133,749
                          
                          
                          
                          104,629Noncontrolling
      interest in subsidiaries
                          
                          
                          -
                          
                          
                          
                          1
                          
                          
                          
                          1Total
      equity
                          
                          
                          108,757
                          
                          
                          
                          133,750
                          
                          
                          
                          104,630$
                          1,546,635
                          
                          
                          $
                          1,676,469
                          
                          
                          $
                          1,662,968
 
 The
accompanying notes are an integral part of these financial
statements.
  3
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Consolidated
Statements of Operations
 (Unaudited)
 
 (Dollars in thousands, except per share data)
                            
                            Three Months Ended
                            
                            
                            Nine Months EndedSeptember 30
                            
                            
                            September 302010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Interest income:Interest
      and fees on loans
                            
                            $
                            15,532
                            
                            
                            $
                            16,798
                            
                            
                            $
                            46,607
                            
                            
                            $
                            50,147Interest
      on loans held for sale
                            
                            
                            46
                            
                            
                            
                            76
                            
                            
                            
                            170
                            
                            
                            
                            192Taxable
      investments
                            
                            
                            1,863
                            
                            
                            
                            2,507
                            
                            
                            
                            5,940
                            
                            
                            
                            7,318Tax-exempt
      investments
                            
                            
                            374
                            
                            
                            
                            519
                            
                            
                            
                            1,196
                            
                            
                            
                            1,617Federal
      funds sold
                            
                            
                            17
                            
                            
                            
                            22
                            
                            
                            
                            67
                            
                            
                            
                            61Interest
      bearing bank balances
                            
                            
                            23
                            
                            
                            
                            4
                            
                            
                            
                            109
                            
                            
                            
                            12Total
      interest income
                            
                            
                            17,855
                            
                            
                            
                            19,926
                            
                            
                            
                            54,089
                            
                            
                            
                            59,347Interest
      expense:Deposits
                            
                            
                            4,471
                            
                            
                            
                            5,758
                            
                            
                            
                            14,632
                            
                            
                            
                            18,249Federal
      funds purchased and repurchase agreements
                            
                            
                            15
                            
                            
                            
                            26
                            
                            
                            
                            49
                            
                            
                            
                            83Other
      borrowings
                            
                            
                            576
                            
                            
                            
                            1,345
                            
                            
                            
                            2,488
                            
                            
                            
                            4,120Junior
      subordinated debt
                            
                            
                            499
                            
                            
                            
                            499
                            
                            
                            
                            1,487
                            
                            
                            
                            1,488Total
      interest expense
                            
                            
                            5,561
                            
                            
                            
                            7,628
                            
                            
                            
                            18,656
                            
                            
                            
                            23,940Net
      interest income
                            
                            
                            12,294
                            
                            
                            
                            12,298
                            
                            
                            
                            35,433
                            
                            
                            
                            35,407Provision
      for loan losses
                            
                            
                            2,280
                            
                            
                            
                            4,805
                            
                            
                            
                            6,940
                            
                            
                            
                            33,840Net
      interest income after provision for loan losses
                            
                            
                            10,014
                            
                            
                            
                            7,493
                            
                            
                            
                            28,493
                            
                            
                            
                            1,567Noninterest
      income:Deposit
      account income
                            
                            
                            2,629
                            
                            
                            
                            2,804
                            
                            
                            
                            7,675
                            
                            
                            
                            8,138Mortgage
      banking income
                            
                            
                            330
                            
                            
                            
                            468
                            
                            
                            
                            1,142
                            
                            
                            
                            1,428Agency
      commission income
                            
                            
                            1,112
                            
                            
                            
                            1,097
                            
                            
                            
                            2,945
                            
                            
                            
                            3,025Trust
      and brokerage income
                            
                            
                            141
                            
                            
                            
                            120
                            
                            
                            
                            406
                            
                            
                            
                            372Bank
      owned life insurance income
                            
                            
                            143
                            
                            
                            
                            200
                            
                            
                            
                            483
                            
                            
                            
                            564Other
      income
                            
                            
                            424
                            
                            
                            
                            488
                            
                            
                            
                            1,601
                            
                            
                            
                            1,988Securities
      gains, net
                            
                            
                            4
                            
                            
                            
                            441
                            
                            
                            
                            1,716
                            
                            
                            
                            442Total
      investment other-than-temporary impairment losses
                            
                            
                            (67
                            )
                            
                            
                            (1,225
                            )
                            
                            
                            (435
                            )
                            
                            
                            (1,618
                            )Portion
      of loss recognized in (reclassified from) other comprehensive income
      (before taxes)
                            
                            
                            30
                            
                            
                            
                            988
                            
                            
                            
                            32
                            
                            
                            
                            1,206Net
      investment impairment losses recognized
                            
                            
                            (37
                            )
                            
                            
                            (237
                            )
                            
                            
                            (403
                            )
                            
                            
                            (412
                            )Total
      noninterest income
                            
                            
                            4,746
                            
                            
                            
                            5,381
                            
                            
                            
                            15,565
                            
                            
                            
                            15,545Noninterest
      expenses:Salaries
      and employee benefits
                            
                            
                            6,853
                            
                            
                            
                            7,106
                            
                            
                            
                            20,571
                            
                            
                            
                            21,566Net
      occupancy expenses
                            
                            
                            1,023
                            
                            
                            
                            1,134
                            
                            
                            
                            2,969
                            
                            
                            
                            3,308Equipment
      expenses
                            
                            
                            550
                            
                            
                            
                            706
                            
                            
                            
                            1,859
                            
                            
                            
                            2,195Software
      and processing expenses
                            
                            
                            408
                            
                            
                            
                            465
                            
                            
                            
                            1,227
                            
                            
                            
                            1,458Telecommunication
      expenses
                            
                            
                            242
                            
                            
                            
                            269
                            
                            
                            
                            737
                            
                            
                            
                            784Marketing
      and business development expenses
                            
                            
                            226
                            
                            
                            
                            327
                            
                            
                            
                            694
                            
                            
                            
                            1,047Foreclosed
      property expenses
                            
                            
                            166
                            
                            
                            
                            508
                            
                            
                            
                            1,041
                            
                            
                            
                            2,790FDIC
      insurance assessments
                            
                            
                            808
                            
                            
                            
                            750
                            
                            
                            
                            2,493
                            
                            
                            
                            2,565Goodwill
      impairment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            15,800Intangible
      asset amortization and impairment
                            
                            
                            107
                            
                            
                            
                            107
                            
                            
                            
                            320
                            
                            
                            
                            1,581Other
      expenses
                            
                            
                            2,728
                            
                            
                            
                            2,768
                            
                            
                            
                            7,951
                            
                            
                            
                            7,902Total
      noninterest expenses
                            
                            
                            13,111
                            
                            
                            
                            14,140
                            
                            
                            
                            39,862
                            
                            
                            
                            60,996Income
      (loss) before income taxes
                            
                            
                            1,649
                            
                            
                            
                            (1,266
                            )
                            
                            
                            4,196
                            
                            
                            
                            (43,884
                            )Income
      tax expense (benefit)
                            
                            
                            407
                            
                            
                            
                            (1,137
                            )
                            
                            
                            828
                            
                            
                            
                            (11,389
                            )Net
      income (loss)
                            
                            
                            1,242
                            
                            
                            
                            (129
                            )
                            
                            
                            3,368
                            
                            
                            
                            (32,495
                            )Net
      income (loss) attributable to noncontrolling interests
                            
                            
                            (3
                            )
                            
                            
                            7
                            
                            
                            
                            (2
                            )
                            
                            
                            (7
                            )Net
      income (loss) attributable to First M&F Corporation
                            
                            $
                            1,245
                            
                            
                            $
                            (136
                            )
                            
                            $
                            3,370
                            
                            
                            $
                            (32,488
                            )Dividends
      and accretion on preferred stock
                            
                            
                            441
                            
                            
                            
                            435
                            
                            
                            
                            1,317
                            
                            
                            
                            1,028Gain
      on exchange of preferred stock
                            
                            
                            12,867
                            
                            
                            
                            -
                            
                            
                            
                            12,867
                            
                            
                            
                            -Net
      income (loss) applicable to common stock
                            
                            $
                            13,671
                            
                            
                            $
                            (571
                            )
                            
                            $
                            14,920
                            
                            
                            $
                            (33,516
                            )Net
      income (loss) allocated to common shareholders
                            
                            $
                            13,565
                            
                            
                            $
                            (580
                            )
                            
                            $
                            14,804
                            
                            
                            $
                            (33,167
                            )Earnings
      (loss) per share:Basic
                            
                            $
                            1.49
                            
                            
                            $
                            (.06
                            )
                            
                            $
                            1.63
                            
                            
                            $
                            (3.66
                            )Diluted
                            
                            $
                            1.49
                            
                            
                            $
                            (.06
                            )
                            
                            $
                            1.63
                            
                            
                            $
                            (3.66
                            )
 The accompanying notes are an integral
part of these financial statements.
 4
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Consolidated
Statements of Comprehensive Income
 (Unaudited)
 
 Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30
                  
                  
                  September 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income (loss)
                  
                  $
                  1,242
                  
                  
                  $
                  (129
                  )
                  
                  $
                  3,368
                  
                  
                  $
                  (32,495
                  )Other
      comprehensive income:Unrealized
      gains (losses) on securities:Unrealized
      gains on securities available for sale arising during the period, net of
      tax of $28 and $1,478 for the three months ended September 30 and $1,560
      and $1,844 for the nine months ended September 30
                  
                  
                  53
                  
                  
                  
                  2,484
                  
                  
                  
                  2,625
                  
                  
                  
                  3,100Unrealized
      losses on other-than-temporarily impaired securities available for sale
      arising during the period, net of tax of $28 and $487 for the three months
      ended ended September 30 and $102 and $633 for the nine months ended
      September 30
                  
                  
                  (50
                  )
                  
                  
                  (818
                  )
                  
                  
                  (173
                  )
                  
                  
                  (1,065
                  )Reclassification
      adjustment for gains on securities available for sale included in net
      income, net of tax of $1 and $165 for the three months ended September 30
      and $640 and $165 for the nine months ended September 30
                  
                  
                  (3
                  )
                  
                  
                  (276
                  )
                  
                  
                  (1,076
                  )
                  
                  
                  (277
                  )Reclassification
      adjustment for credit related other-than- temporary impairment losses on
      securities available for sale included in net income, net of tax of $13
      and $88 for the three months ended September 30 and $150 and $153 for for
      the nine months ended September 30
                  
                  
                  24
                  
                  
                  
                  149
                  
                  
                  
                  253
                  
                  
                  
                  259Defined
      benefit pension plans:Amortization
      of transition asset, net of tax of $0 and $0 for the three months ended
      September 30 and $0 and $2 for the nine months ended September
      30
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  (3
                  )Amortization
      of prior service cost, net of tax of $5 and $4 for the three months ended
      September 30 and $10 and $10 for the nine months ended September
      30
                  
                  
                  (6
                  )
                  
                  
                  (6
                  )
                  
                  
                  (18
                  )
                  
                  
                  (18
                  )Amortization
      of actuarial loss, net of tax of $82 and $84 for the three months ended
      September 30 and $247 and $253 for the nine months ended September
      30
                  
                  
                  139
                  
                  
                  
                  142
                  
                  
                  
                  416
                  
                  
                  
                  426Other
      comprehensive income
                  
                  
                  157
                  
                  
                  
                  1,674
                  
                  
                  
                  2,027
                  
                  
                  
                  2,422Total
      comprehensive income (loss)
                  
                  
                  1,399
                  
                  
                  
                  1,545
                  
                  
                  
                  5,395
                  
                  
                  
                  (30,073
                  )Comprehensive
      income (loss) attributable to noncontrolling interests
                  
                  
                  (3
                  )
                  
                  
                  7
                  
                  
                  
                  (2
                  )
                  
                  
                  (7
                  )Comprehensive
      income (loss) of First M&F Corp
                  
                  $
                  1,402
                  
                  
                  $
                  1,538
                  
                  
                  $
                  5,397
                  
                  
                  $
                  (30,066
                  )
 
 The
accompanying notes are an integral part of these financial
statements.
  5
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Consolidated
Statements of Stockholders' Equity
 Nine
Months Ended September 30, 2010 and 2009
 (Unaudited)
  (Dollars
      in thousands, except per share data)
                        
                        
                        
                        
                        
                        Nonvested
                        
                        
                        
                        
                        
                        AccumulatedAdditional
                        
                        
                        Restricted
                        
                        
                        Retained
                        
                        
                        OtherPreferred
                        
                        
                        Common
                        
                        
                        Paid-in
                        
                        
                        Stock
                        
                        
                        Earnings
                        
                        
                        Comprehensive
                        
                        
                        NoncontrollingStock
                        
                        
                        Stock
                        
                        
                        Capital
                        
                        
                        Awards
                        
                        
                        (Deficit)
                        
                        
                        Income
      (Loss)
                        
                        
                        Interest
                        
                        
                        TotalJanuary
      1, 2009
                        
                        $
                        -
                        
                        
                        $
                        45,317
                        
                        
                        $
                        30,447
                        
                        
                        $
                        780
                        
                        
                        $
                        60,133
                        
                        
                        $
                        (727
                        )
                        
                        $
                        18
                        
                        
                        $
                        135,968Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (32,488
                        )
                        
                        
                        -
                        
                        
                        
                        (7
                        )
                        
                        
                        (32,495
                        )Cash
      dividends ($.15 per share)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,375
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,375
                        )Issuance
      of 30,000 shares of preferred stock
                        
                        
                        28,637
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        28,637Issuance
      of stock warrant for 513,113 shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,363
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,363Dividends
      and accretion on preferred stock
                        
                        
                        141
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,028
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (887
                        )6,000
      restricted share awards vested
                        
                        
                        -
                        
                        
                        
                        30
                        
                        
                        
                        71
                        
                        
                        
                        (101
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Share-based
      compensation expense recognized
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        14
                        
                        
                        
                        86
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100Tax
      benefits on restricted stock dividends paid
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        27
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        27Net
      change
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,422
                        
                        
                        
                        -
                        
                        
                        
                        2,422Distributions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (10
                        )
                        
                        
                        (10
                        )September
      30, 2009
                        
                        $
                        28,778
                        
                        
                        $
                        45,347
                        
                        
                        $
                        31,922
                        
                        
                        $
                        765
                        
                        
                        $
                        25,242
                        
                        
                        $
                        1,695
                        
                        
                        $
                        1
                        
                        
                        $
                        133,750January
      1, 2010
                        
                        $
                        28,838
                        
                        
                        $
                        45,347
                        
                        
                        $
                        31,926
                        
                        
                        $
                        734
                        
                        
                        $
                        (
      2,595
                        )
                        
                        $
                        379
                        
                        
                        $
                        1
                        
                        
                        $
                        104,630Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,370
                        
                        
                        
                        -
                        
                        
                        
                        (2
                        )
                        
                        
                        3,368Cash
      dividends ($.03 per share)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (275
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (275
                        )28,206
      shares granted to directors
                        
                        
                        -
                        
                        
                        
                        141
                        
                        
                        
                        (41
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100Dividends
      and accretion on preferred stock
                        
                        
                        193
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,317
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,124
                        )Gain
      on exchange of preferred stock
                        
                        
                        (12,867
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        12,867
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Share-based
      compensation expense recognized
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8
                        
                        
                        
                        22
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        30Net
      change
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,027
                        
                        
                        
                        -
                        
                        
                        
                        2,027Distributions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        1September
      30, 2010
                        
                        $
                        16,164
                        
                        
                        $
                        45,488
                        
                        
                        $
                        31,893
                        
                        
                        $
                        756
                        
                        
                        $
                        12,050
                        
                        
                        $
                        2,406
                        
                        
                        $
                        -
                        
                        
                        $
                        108,757
 
 The
accompanying notes are an integral part of these financial
statements.
  6
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Consolidated
Statements of Cash Flows
 (Unaudited)
  (Dollars in thousands)
                  
                  Nine Months Ended September 302010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  3,368
                  
                  
                  $
                  (32,495
                  )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Share-based
      compensation
                  
                  
                  30
                  
                  
                  
                  100Amortization
      of pension costs
                  
                  
                  366
                  
                  
                  
                  658Depreciation
      and amortization
                  
                  
                  2,060
                  
                  
                  
                  2,387Goodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  15,800Intangible
      asset impairments
                  
                  
                  -
                  
                  
                  
                  1,248Provision
      for loan losses
                  
                  
                  6,940
                  
                  
                  
                  33,840Net
      investment amortization
                  
                  
                  1,498
                  
                  
                  
                  770Net
      change in unearned fees/deferred costs on loans
                  
                  
                  (25
                  )
                  
                  
                  (76
                  )Capitalized
      dividends on FHLB stock
                  
                  
                  (20
                  )
                  
                  
                  (16
                  )Net
      accretion of discount on time deposits
                  
                  
                  20
                  
                  
                  
                  2Gain
      on securities available for sale
                  
                  
                  (1,716
                  )
                  
                  
                  (442
                  )Impairment
      loss on securities available for sale
                  
                  
                  403
                  
                  
                  
                  412Gain
      on loans held for sale
                  
                  
                  (948
                  )
                  
                  
                  (775
                  )Other
      asset sales losses
                  
                  
                  712
                  
                  
                  
                  1,887Deferred
      income taxes
                  
                  
                  828
                  
                  
                  
                  (4,398
                  )Originations
      of loans held for sale, net of repayments
                  
                  
                  (60,337
                  )
                  
                  
                  (86,140
                  )Sales
      proceeds of loans held for sale
                  
                  
                  67,714
                  
                  
                  
                  87,906(Increase)
      decrease in:Accrued
      interest receivable
                  
                  
                  980
                  
                  
                  
                  1,552Cash
      surrender value of bank owned life insurance
                  
                  
                  (483
                  )
                  
                  
                  (564
                  )Other
      assets
                  
                  
                  (2,344
                  )
                  
                  
                  (6,425
                  )Increase
      (decrease) in:Accrued
      interest payable
                  
                  
                  (1,378
                  )
                  
                  
                  (565
                  )Other
      liabilities
                  
                  
                  3,053
                  
                  
                  
                  2,124Net
      cash provided by operating activities
                  
                  
                  20,721
                  
                  
                  
                  16,790Cash
      flows from investing activities:Purchases
      of securities available for sale
                  
                  
                  (123,543
                  )
                  
                  
                  (141,454
                  )Sales
      of securities available for sale
                  
                  
                  68,188
                  
                  
                  
                  14,127Maturities
      of securities available for sale
                  
                  
                  69,851
                  
                  
                  
                  53,640Net
      (increase) decrease in:Interest
      bearing bank balances
                  
                  
                  51,905
                  
                  
                  
                  (51,378
                  )Federal
      funds sold
                  
                  
                  45,000
                  
                  
                  
                  (40,650
                  )Loans
                  
                  
                  (21,141
                  )
                  
                  
                  18,559Bank
      premises and equipment
                  
                  
                  (99
                  )
                  
                  
                  (929
                  )Net
      benefits received (purchases) of bank owned life insurance
                  
                  
                  (30
                  )
                  
                  
                  191Sales
      of nonperforming loans
                  
                  
                  500
                  
                  
                  
                  -Proceeds
      from sales of other real estate and other repossessed
    assets
                  
                  
                  5,647
                  
                  
                  
                  13,940Net
      redemptions of FHLB stock
                  
                  
                  -
                  
                  
                  
                  225Net
      cash provided by (used in) investing activities
                  
                  
                  96,278
                  
                  
                  
                  (133,729
                  )
 
 (Continued)
  7
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Consolidated
Statements of Cash Flows
 (Unaudited)
  (Dollars in thousands)
                  
                  Nine Months Ended September 302010
                  
                  
                  2009Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                  
                  $
                  (66,404
                  )
                  
                  $
                  95,428Net
      increase (decrease) in short-term borrowings
                  
                  
                  17,042
                  
                  
                  
                  2,436Proceeds
      from other borrowings
                  
                  
                  -
                  
                  
                  
                  20,000Repayments
      of other borrowings
                  
                  
                  (72,369
                  )
                  
                  
                  (37,796
                  )Earnings
      distributions to noncontrolling interests
                  
                  
                  1
                  
                  
                  
                  (10
                  )Common
      stock issued
                  
                  
                  100
                  
                  
                  
                  -Common
      dividends paid
                  
                  
                  (275
                  )
                  
                  
                  (1,375
                  )Preferred
      dividends paid
                  
                  
                  (1,308
                  )
                  
                  
                  (700
                  )Preferred
      shares and common stock warrant issued to U. S. Treasury
                  
                  
                  -
                  
                  
                  
                  30,000Tax
      benefits related to share-based compensation
                  
                  
                  -
                  
                  
                  
                  27Net
      cash provided by (used in) financing activities
                  
                  
                  (123,213
                  )
                  
                  
                  108,010Net
      decrease in cash and due from banks
                  
                  
                  (6,214
                  )
                  
                  
                  (8,929
                  )Cash
      and due from banks at January 1
                  
                  
                  42,446
                  
                  
                  
                  47,738Cash
      and due from banks at September 30
                  
                  $
                  36,232
                  
                  
                  $
                  38,809Supplemental
      disclosures:Total
      interest paid
                  
                  $
                  20,046
                  
                  
                  $
                  24,497Total
      income taxes paid
                  
                  
                  231
                  
                  
                  
                  97Income
      tax refunds received
                  
                  
                  210
                  
                  
                  
                  27Total
      payments to other banks to satisfy liens on ORE
                  
                  
                  433
                  
                  
                  
                  -Transfers
      of loans to foreclosed property
                  
                  
                  21,144
                  
                  
                  
                  32,877Transfers
      of buildings to foreclosed property
                  
                  
                  176
                  
                  
                  
                  -Gain
      on exchange of Class B preferred stock
                  
                  
                  12,867
                  
                  
                  
                  -U.
      S. Treasury preferred dividend accrued but unpaid
                  
                  
                  3
                  
                  
                  
                  187Accretion
      on U. S. Treasury preferred stock
                  
                  
                  193
                  
                  
                  
                  141
 
 The
accompanying notes are an integral part of these financial
statements.
  8
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 1:  Basis of
Presentation
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The condensed balance sheet as of December 31, 2009, has been
derived from audited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The condensed consolidated financial
statements include all entities in which the Company has a controlling financial
interest. Therefore, the condensed consolidated financial statements of First M
& F Corporation include the financial statements of Merchants and Farmers
Bank, a wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First
M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F
Bank Securities Corporation, M & F Insurance Agency, Inc., M & F
Insurance Group, Inc., and M & F Business Credit, Inc. The consolidated
financial statements also include the Bank’s 55% ownership in MS Statewide
Title, LLC, a title insurance agency. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2009.
Operating results for the interim periods disclosed herein are not necessarily
indicative of the results that may be expected for a full year or any future
period.
 
 The
Company is substantially in the business of community banking and therefore is
considered a banking operation with no separately reportable
segments.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about future economic and market conditions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Although our estimates and assumptions contemplate current
economic conditions and how we expect them to change in the future, it is
reasonably possible that in future months actual conditions could be worse than
those anticipated, which could materially affect our financial condition and
results of operations. The allowance for loan losses, the fair value of
financial instruments and other-than-temporary investment impairments represent
significant estimates.
 
 Certain
reclassifications have been made to the 2009 financial statements to be
consistent with the 2010 presentation.
 
 Note 2:  Fair
Value
 
 Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A
fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability. Valuation techniques use certain inputs to arrive at fair
value. Inputs to valuation techniques are the assumptions that market
participants would use in pricing the asset or liability. They may be observable
or unobservable. Applicable accounting principles establish a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. Assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. The fair value hierarchy is as follows:
 
 Level 1
Inputs – Unadjusted quoted market prices in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date.
 
 Level 2
Inputs – Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability
(such as interest rates, volatilities, prepayment speeds or credit risks) or
inputs that are derived principally from or corroborated by market data by
correlation or other means.
 
 Level 3
Inputs – Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions that
market participants would use in pricing the assets or
liabilities.
  9
 FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 The
following table summarizes assets and liabilities measured at fair value on a
recurring basis as of September 30, 2010, December 31, 2009 and September 30,
2009, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
 
 Fair Value Measurements atSeptember 30, 2010, UsingQuotedPrices InActiveMarkets
                  
                  
                  SignificantAssets/Liabilities
                  
                  
                  For
                  
                  
                  Other
                  
                  
                  SignificantMeasured at Fair
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableValue
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs(Dollars in thousands)
                  
                  September 30, 2010
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)U.S.
      Treasury securities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -U.S.
      Government sponsored entities
                  
                  
                  63,482
                  
                  
                  
                  -
                  
                  
                  
                  63,482
                  
                  
                  
                  -Mortgage-backed
      investments
                  
                  
                  160,456
                  
                  
                  
                  -
                  
                  
                  
                  160,456
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  45,992
                  
                  
                  
                  -
                  
                  
                  
                  45,992
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  805
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  805Other
      debt securities
                  
                  
                  1,732
                  
                  
                  
                  -
                  
                  
                  
                  1,732
                  
                  
                  
                  -Total
      securities available for sale
                  
                  $
                  272,467
                  
                  
                  $
                  -
                  
                  
                  $
                  271,662
                  
                  
                  $
                  805Mortgage
      derivative assets
                  
                  
                  27
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27Mortgage
      derivative liabilities
                  
                  
                  44
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44
 
 Fair Value Measurements atDecember 31, 2009, UsingQuotedPrices InActiveMarkets
                  
                  
                  SignificantAssets/Liabilities
                  
                  
                  For
                  
                  
                  Other
                  
                  
                  SignificantMeasured at Fair
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableValue
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs(Dollars in thousands)
                  
                  December 31, 2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)U.S.
      Treasury securities
                  
                  $
                  517
                  
                  
                  $
                  -
                  
                  
                  $
                  517
                  
                  
                  $
                  -U.S.
      Government sponsored entities
                  
                  
                  55,161
                  
                  
                  
                  -
                  
                  
                  
                  55,161
                  
                  
                  
                  -Mortgage-backed
      investments
                  
                  
                  167,875
                  
                  
                  
                  -
                  
                  
                  
                  167,875
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  56,586
                  
                  
                  
                  -
                  
                  
                  
                  56,586
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  1,080
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,080Other
      debt securities
                  
                  
                  2,486
                  
                  
                  
                  -
                  
                  
                  
                  2,486
                  
                  
                  
                  -Equity
      securities
                  
                  
                  845
                  
                  
                  
                  845
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      available for sale securities
                  
                  $
                  284,550
                  
                  
                  $
                  845
                  
                  
                  $
                  282,625
                  
                  
                  $
                  1,080Mortgage
      derivative assets
                  
                  
                  85
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  85Mortgage
      derivative liabilities
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
  10
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
  Note
2:  (Continued)
 
 Fair Value Measurements atSeptember 30, 2009, UsingQuotedPrices InActiveMarkets
                  
                  
                  SignificantAssets/Liabilities
                  
                  
                  For
                  
                  
                  Other
                  
                  
                  SignificantMeasured at Fair
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableValue
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs(Dollars in thousands)
                  
                  September 30, 2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)U.S.
      Treasury securities
                  
                  $
                  523
                  
                  
                  $
                  -
                  
                  
                  $
                  523
                  
                  
                  $
                  -U.S.
      Government sponsored entities
                  
                  
                  55,650
                  
                  
                  
                  -
                  
                  
                  
                  55,650
                  
                  
                  
                  -Mortgage-backed
      investments
                  
                  
                  180,647
                  
                  
                  
                  -
                  
                  
                  
                  180,647
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  61,099
                  
                  
                  
                  -
                  
                  
                  
                  61,099
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  2,040
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,040Other
      debt securities
                  
                  
                  2,357
                  
                  
                  
                  -
                  
                  
                  
                  2,357
                  
                  
                  
                  -Equity
      securities
                  
                  
                  989
                  
                  
                  
                  -
                  
                  
                  
                  989
                  
                  
                  
                  -Total
      securities available for sale
                  
                  $
                  303,305
                  
                  
                  $
                  -
                  
                  
                  $
                  301,265
                  
                  
                  $
                  2,040Mortgage
      derivative assets
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  -Mortgage
      derivative liabilities
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  -
 
 U.S. Treasury, Government sponsored
entity and mortgage-backed securities. Securities issued by the U.S.
Treasury and Government sponsored entities and mortgage-backed securities are
traded in a dealer market and are reported at fair value utilizing Level 2
inputs. For these securities, the Company obtains fair value measurements from
an independent pricing service that primarily uses trading activity in the
dealer market to determine market prices.
 
 Obligations of states and political
subdivisions. Municipal securities include investments that are traded in
a dealer market and investments that trade infrequently and are reported using
Level 2 inputs. The fair value measurements are obtained from both an
independent pricing service and from a correspondent bank’s broker-dealer
portfolio accounting product that utilizes a pricing matrix that considers
observable inputs obtained from a municipal security data provider such as
dealer quotes, market yield curves, credit information (including observable
default rates) and the instrument’s contractual terms and conditions, among
other things.
 
 Other debt securities. Other
debt securities trade in a dealer market and are reported using Level 2 inputs.
The fair value measurements are provided by an independent pricing service and
are derived from trading activity in the dealer market.
 
 Collateralized debt
obligations. The Company owns certain beneficial interests in
collateralized debt obligations secured by community bank trust preferred
securities. These interests have an amortized cost of $3.768 million with
estimated fair values of $805 thousand. These interests do not trade in a liquid
market, and therefore, market quotes are not a reliable indicator of their
ultimate realizability. The Company utilizes a discounted cash flow model using
inputs of (1) market yields of trust-preferred securities as the discount rate
and (2) expected cash flows which are estimated using assumptions related to
defaults, deferrals and prepayments to determine the fair values of these
beneficial interests. Many of the factors that adjust the timing and extent of
cash flows are based on judgment and not directly observable in the markets.
Therefore, these fair values are classified as Level 3 valuations for accounting
and disclosure purposes.
  11
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 Equity securities. Equity
securities are comprised of mutual funds that are actively exchanged at their
net asset value (NAV).
 
 Mortgage
Derivatives.  Throughout 2009 mortgage derivative assets and
liabilities were reported at fair value utilizing Level 2 inputs. These assets
and liabilities represent the fair values of the interest rate lock commitments
(IRLCs) of the Company to originate mortgages at certain rates as well as the
commitments, or forward sale agreements (FSAs), to sell the mortgages to
investors at locked prices within a specified period of time. The Company uses
an internal valuation model with observable market data inputs consisting
primarily of dealer quotes, market yield curves and credit-related adjustments.
The most significant inputs used in 2009 were dealer quotes. During the fourth
quarter of 2009 the model for FSA derivatives was changed to supplement the
dealer quotes with estimates of servicing values. The model for IRLC derivatives
was adjusted to use estimated pull-through rates. Therefore, these instruments
were transferred to Level 3 status upon their valuations at December 31,
2009.  Mortgage derivative assets are included in other assets and
mortgage derivative liabilities are included in other liabilities in the
Company’s balance sheet.
 
 The
following table reports the activity for 2010 in assets measured at fair value
on a recurring basis using significant unobservable (Level 3)
inputs.
 
 Three Months Ended
                  
                  
                  Nine Months Ended(Dollars in thousands)
                  
                  September 30, 2010
                  
                  
                  September 30, 2010Collateralized
                  
                  
                  
                  
                  
                  CollateralizedDebt
                  
                  
                  Mortgage
                  
                  
                  Debt
                  
                  
                  MortgageObligations
                  
                  
                  Derivatives
                  
                  
                  Obligations
                  
                  
                  DerivativesBeginning
      Balance
                  
                  $
                  883
                  
                  
                  $
                  90
                  
                  
                  $
                  1,080
                  
                  
                  $
                  84Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                  
                  
                  (37
                  )
                  
                  
                  -
                  
                  
                  
                  (403
                  )
                  
                  
                  -Other-than-temporary
      impairment (included in) transferred from other comprehensive
      income
                  
                  
                  (30
                  )
                  
                  
                  -
                  
                  
                  
                  (32
                  )
                  
                  
                  -Other
      gains/losses included in other comprehensive income
                  
                  
                  (11
                  )
                  
                  
                  -
                  
                  
                  
                  160
                  
                  
                  
                  -IRLC
      and FSA issuances, expirations and fair value changes included in
      earnings
                  
                  
                  -
                  
                  
                  
                  (97
                  )
                  
                  
                  -
                  
                  
                  
                  (11
                  )IRLC
      transfers into closed loans
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  -
                  
                  
                  
                  (90
                  )Ending
      Balance
                  
                  $
                  805
                  
                  
                  $
                  (17
                  )
                  
                  $
                  805
                  
                  
                  $
                  (17
                  )The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                  
                  $
                  (37
                  )
                  
                  $
                  -
                  
                  
                  $
                  (403
                  )
                  
                  $
                  -
 
 The
following table reports the activity for 2009 in assets measured at fair value
on a recurring basis using significant unobservable (Level 3)
inputs.
 
 Collateral Debt ObligationsThree Months
                      
                      
                      Nine Months(Dollars in thousands)
                      
                      Ended
                      
                      
                      EndedSeptember 30, 2009
                      
                      
                      September 30, 2009Beginning Balance
                      
                      $
                      3,254
                      
                      
                      $
                      -Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                      
                      
                      (237
                      )
                      
                      
                      (412
                      )Other-than-temporary
      impairment (included in) transferred from other comprehensive
      income
                      
                      
                      (988
                      )
                      
                      
                      (1,206
                      )Other
      gains/losses included in other comprehensive income
                      
                      
                      11
                      
                      
                      
                      (308
                      )Transfers
      in and/or out of Level 3
                      
                      
                      -
                      
                      
                      
                      3,966Ending
      Balance
                      
                      $
                      2,040
                      
                      
                      $
                      2,040The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                      
                      $
                      (237
                      )
                      
                      $
                      (412
                      )
  12
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
  Note
2:  (Continued)
 
 The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of September 30, 2010, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
 
 Fair Value Measurements UsingQuotedPrices in
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Fair ValueActive
                  
                  
                  Significant
                  
                  
                  
                  
                  
                  Charged to
                  
                  
                  AdjustmentFor the
                  
                  
                  Markets for
                  
                  
                  Other
                  
                  
                  Significant
                  
                  
                  Allowance
                  
                  
                  RecognizedQuarter-to-Date
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for Loan Losses
                  
                  
                  In EarningsEnded
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars in thousands)
                  
                  09/30/10 (a)
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Current Period
                  
                  
                  Current PeriodImpaired loans
                  
                  $
                  12,183
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  12,183
                  
                  
                  $
                  -
                  
                  
                  $
                  (2,368
                  )Loan
      foreclosures
                  
                  
                  2,513
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,513
                  
                  
                  
                  1,011
                  
                  
                  
                  -Other
      real estate
                  
                  
                  2,729
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,729
                  
                  
                  
                  -
                  
                  
                  
                  (233
                  )
 
 Fair Value Measurements UsingQuotedPrices in
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Fair ValueActive
                  
                  
                  Significant
                  
                  
                  
                  
                  
                  Charged to
                  
                  
                  AdjustmentFor the
                  
                  
                  Markets for
                  
                  
                  Other
                  
                  
                  Significant
                  
                  
                  Allowance
                  
                  
                  RecognizedYear-to-Date
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for Loan Losses
                  
                  
                  In EarningsEnded
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars in thousands)
                  
                  09/30/10 (a)
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Current Period
                  
                  
                  Current PeriodImpaired loans
                  
                  $
                  19,754
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  19,754
                  
                  
                  $
                  -
                  
                  
                  $
                  (6,016
                  )Loan
      foreclosures
                  
                  
                  7,143
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,143
                  
                  
                  
                  2,607
                  
                  
                  
                  -Loans
      transferred to HFS
                  
                  
                  500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  325
                  
                  
                  
                  -Other
      real estate
                  
                  
                  10,924
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,924
                  
                  
                  
                  -
                  
                  
                  
                  (895
                  )
 
 The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of September 30, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
 
 Fair Value Measurements UsingQuotedPrices in
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Fair ValueActive
                    
                    
                    Significant
                    
                    
                    
                    
                    
                    Charged to
                    
                    
                    AdjustmentFor the
                    
                    
                    Markets for
                    
                    
                    Other
                    
                    
                    Significant
                    
                    
                    Allowance
                    
                    
                    RecognizedQuarter-to-Date
                    
                    
                    Identical
                    
                    
                    Observable
                    
                    
                    Unobservable
                    
                    
                    for Loan Losses
                    
                    
                    In EarningsEnded
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    Inputs
                    
                    
                    During
                    
                    
                    During(Dollars in thousands)
                    
                    09/30/09 (a)
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)
                    
                    
                    Current Period
                    
                    
                    Current PeriodImpaired loans
                    
                    $
                    49,969
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    49,969
                    
                    
                    $
                    -
                    
                    
                    $
                    (1,617
                    )Loan
      foreclosures
                    
                    
                    8,971
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,971
                    
                    
                    
                    5,698
                    
                    
                    
                    -Other
      real estate
                    
                    
                    839
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    839
                    
                    
                    
                    -
                    
                    
                    
                    (30
                    )
  13
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 Fair Value Measurements UsingQuotedPrices in
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Fair ValueActive
                    
                    
                    Significant
                    
                    
                    
                    
                    
                    Charged to
                    
                    
                    AdjustmentFor the
                    
                    
                    Markets for
                    
                    
                    Other
                    
                    
                    Significant
                    
                    
                    Allowance
                    
                    
                    RecognizedYear-to-Date
                    
                    
                    Identical
                    
                    
                    Observable
                    
                    
                    Unobservable
                    
                    
                    for Loan Losses
                    
                    
                    In EarningsEnded
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    Inputs
                    
                    
                    During
                    
                    
                    During(Dollars in thousands)
                    
                    09/30/09 (a)
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)
                    
                    
                    Current Period
                    
                    
                    Current PeriodImpaired
      loans
                    
                    $
                    49,969
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    49,969
                    
                    
                    $
                    -
                    
                    
                    $
                    (22,830
                    )Loan
      foreclosures
                    
                    
                    21,481
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    21,481
                    
                    
                    
                    9,827
                    
                    
                    
                    -Other
      real estate
                    
                    
                    2,316
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,316
                    
                    
                    
                    -
                    
                    
                    
                    (427
                    )
 
 (a)
              These
      amounts represent the resulting carrying amounts on the consolidated
      statement of condition for impaired real estate- secured loans and other
      real estate for which fair value re-measurements took place during the
      period. Loan foreclosures represent the fair value portion of the carrying
      amounts of other real estate properties that were re-measured at the point
      of foreclosure during the period.
 
 Gains and
losses recognized due to fair value re-measurements are recorded in the
consolidated statements of operations in (1) provision for loan losses for
impaired loans and (2) foreclosed property expenses for other real
estate.
 
 Impaired
Loans.  Certain financial assets such as impaired loans are
measured by means that are similar to fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to adjustments similar to fair value adjustments in certain
circumstances, such as when there is evidence of impairment. Impaired values are
determined by discounting expected cash flows by a rate equal to the original
yield on the loan rather than by a market discount rate. However, when market
prices or dealer quotes for loans are available and can be used, then the
impaired value does meet the definition of fair value. Collateral dependent
loans, which are loans for which the repayment is expected to be provided solely
by the underlying collateral, are valued for impairment purposes by using the
fair value of the underlying collateral. For collateral dependent loans,
collateral values are estimated using Level 3 inputs based on observable market
data.
 
 Loan
Foreclosures.  Certain foreclosed assets, upon initial
recognition, were re-measured and reported at fair value through a charge-off to
the allowance for possible loan losses based upon the fair value of the
foreclosed asset. The fair value of a foreclosed asset, upon initial
recognition, is estimated using Level 3 inputs based on observable market
data.
 
 Loans Transferred To Held For
Sale.  Certain nonperforming loans held for investment were
transferred to held for sale status during 2010. Loans with an amortized cost of
$825 thousand were written down by $325 thousand to a fair value of $500
thousand upon transfer to held for sale status. The $325 thousand write-down was
charged to the allowance for loan losses. The loans were subsequently sold for
$500 thousand.
 
 Other real
estate.  Other real estate consists of real estate from loans
that have been foreclosed on. It is carried at the lower of cost or fair value
less costs to sell. Subsequent to foreclosure, these properties may experience
further market declines. When this occurs, the Company writes the property down
to management’s best estimate of what the market may be willing to pay.
Management considers what other properties have sold for, how long properties
have been on the market, the condition of the property, the availability of
liquid buyers and other assumptions that market participants may use in
determining a price at which they would acquire the property. Since certain
significant inputs to these estimates are management-derived and unobservable,
fair values are reported as using Level 3 inputs.
  14
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 Fair Value of Financial
Instruments
 
 The
following table presents the carrying amounts and fair values of the Company’s
financial instruments at September 30, 2010 and December 31, 2009:
 
 September 30, 2010
                  
                  
                  December 31, 2009(Dollars in thousands)
                  
                  Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair ValueFinancial
      assets:Cash
      and short-term investments
                  
                  $
                  94,136
                  
                  
                  $
                  94,136
                  
                  
                  $
                  197,256
                  
                  
                  $
                  197,256Securities
      available for sale
                  
                  
                  272,467
                  
                  
                  
                  272,467
                  
                  
                  
                  284,550
                  
                  
                  
                  284,550Loans
      held for sale
                  
                  
                  3,893
                  
                  
                  
                  3,960
                  
                  
                  
                  10,266
                  
                  
                  
                  10,270Loans
      held for investment
                  
                  
                  1,026,936
                  
                  
                  
                  968,587
                  
                  
                  
                  1,034,326
                  
                  
                  
                  996,382Agency
      accounts receivable
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  357
                  
                  
                  
                  357Accrued
      interest receivable
                  
                  
                  6,617
                  
                  
                  
                  6,617
                  
                  
                  
                  7,598
                  
                  
                  
                  7,598Nonmarketable
      equity investments
                  
                  
                  7,346
                  
                  
                  
                  7,346
                  
                  
                  
                  7,326
                  
                  
                  
                  7,326Investments
      in unconsolidated VIEs
                  
                  
                  3,749
                  
                  
                  
                  3,749
                  
                  
                  
                  928
                  
                  
                  
                  928Mortgage
      derivative assets
                  
                  
                  27
                  
                  
                  
                  27
                  
                  
                  
                  85
                  
                  
                  
                  85Financial
      liabilities:Noninterest-bearing
      deposits
                  
                  
                  220,556
                  
                  
                  
                  220,556
                  
                  
                  
                  228,579
                  
                  
                  
                  228,579NOW,
      MMDA and savings deposits
                  
                  
                  587,663
                  
                  
                  
                  587,663
                  
                  
                  
                  583,879
                  
                  
                  
                  583,879Certificates
      of deposit
                  
                  
                  513,660
                  
                  
                  
                  518,927
                  
                  
                  
                  575,806
                  
                  
                  
                  580,895Short-term
      borrowings
                  
                  
                  25,685
                  
                  
                  
                  25,685
                  
                  
                  
                  8,642
                  
                  
                  
                  8,642Other
      borrowings
                  
                  
                  50,141
                  
                  
                  
                  53,418
                  
                  
                  
                  122,510
                  
                  
                  
                  124,021Junior
      subordinated debt
                  
                  
                  30,928
                  
                  
                  
                  22,198
                  
                  
                  
                  30,928
                  
                  
                  
                  15,835Agency
      accounts payable
                  
                  
                  936
                  
                  
                  
                  936
                  
                  
                  
                  639
                  
                  
                  
                  639Accrued
      interest payable
                  
                  
                  1,554
                  
                  
                  
                  1,554
                  
                  
                  
                  2,933
                  
                  
                  
                  2,933Mortgage
      derivative liabilities
                  
                  
                  44
                  
                  
                  
                  44
                  
                  
                  
                  1
                  
                  
                  
                  1Other
      financial instruments:Commitments
      to extend credit and letters of credit
                  
                  
                  (16
                  )
                  
                  
                  (330
                  )
                  
                  
                  (31
                  )
                  
                  
                  (400
                  )
 
 The
following methods and assumptions were used by the Company in estimating the
fair value of financial instruments:
 
 Cash and
due from banks, interest-bearing deposits with banks and Federal funds sold are
valued at their carrying amounts which are reasonable estimates of fair value
due to the relatively short period to maturity of the instruments.
 
 Securities
available for sale are predominantly valued based on prices obtained from an
independent nationally recognized pricing service and market yield matrices. We
use an external pricing service to electronically provide prices by CUSIP
number. These prices include exchange quoted prices, dealer quoted prices and
prices derived from market yields published by specialized financial database
providers. We use the one price per instrument provided for the securities that
the service can produce prices for. We do not adjust the prices that are
obtained from external pricing services. Typically, all securities except for
some small municipal issues and the collateralized debt obligations are priced
by the primary external provider. For issues that are not priced by the primary
provider, we use the pricing disclosed in the investment accounting product
provided by a broker-dealer affiliate of a correspondent bank. The
broker-dealer’s accounting system uses prices provided by (1) the same external
pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with
market yield inputs provided by Bloomberg and a municipal securities market data
provider and (4) the broker-dealer’s trading staff. Any quotes provided by a
broker-dealer are usually non-binding. However, the Company rarely uses
solicited broker-dealer quotes to price any of its securities. The broker-dealer
prices all municipal securities through its pricing matrix. At September 30,
2010, the only securities that were not priced by the primary provider were 21
municipal bonds representing 6 issuers and the collateralized debt obligations.
We used the broker-dealer’s matrix prices for the municipal securities and a
third-party provider’s modeled prices for the collateralized debt obligations
(CDOs).
 
 CDOs are
valued by an external party using a model. The model inputs are (1) discount
margins based on current market activity and (2) cash flows based upon
contractual amounts adjusted for expected defaults, expected deferrals and
expected prepayments. Expected defaults and deferrals are determined through a
credit analysis of and risk rating assignment to each obligor of the collateral
that funds the investment vehicles. Most of these inputs are not directly
observable in the market, resulting in the fair values being classified as Level
3 valuations within the fair value accounting hierarchy.
  15
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 The
primary method of validation of investment security values that we use is the
comparison of the prices that we receive from our primary pricing service
provider with the prices that are used in the broker-dealer’s investment
accounting reports. The fair values used for selected agency, mortgage-backed
and corporate securities are also periodically checked by comparing them to
prices obtained from Bloomberg. The CDOs may be validated by comparing the fair
values with those obtained by other valuation experts. We moved to a new
valuation provider and new model to value the CDOs at September 30, 2009. The
result, primarily due to a change in valuation methodology, was a reduction of
fair values of the CDOs by approximately $1.000 million as compared to their
June 30, 2009 values. The new model incorporated a different methodology for (1)
determining the amounts and timing of future defaults, deferrals, recoveries and
cures and (2) determining the discount rate used. The new model assumptions were
also used as inputs in the third and fourth quarters of 2009 and subsequent
impairment tests of the CDOs. We review the documentation provided with the CDO
pricing and impairment models to assure that sound valuation methodologies are
used and to determine whether or not the significant inputs are observable in
the market.
 
 Loans
held for sale are valued by discounting the estimated cash flows using current
market rates for instruments with similar credit ratings and maturities and
adjusting those rates using dealer pricing adjustments for characteristics
unique to the borrower’s circumstances or the structuring of the
credit.
 
 Loans
held for investment are valued by discounting the estimated future cash flows,
using rates at which these loans would currently be made to borrowers with
similar credit ratings and similar maturities.
 
 Agency
accounts receivable are trade receivables of M&F Insurance Group, Inc. These
receivables are short-term in nature and therefore the fair value is assumed to
be the carrying value. These receivables are carried in other assets in the
statement of condition.
 
 Accrued
interest receivable is short-term in nature and therefore the fair value is
assumed to be the carrying value.
 
 Nonmarketable
equity securities are primarily securities of the Federal Home Loan Banks for
which the carrying value is estimated to be an accurate approximation of fair
value. These equity securities are carried in other assets in the statement of
condition.
 
 Investments
in unconsolidated VIEs are the Company’s investment in the First M&F
Statutory Trust I, which acquired the Company’s junior subordinated debt through
funding provided by the issuance of trust preferred securities, and an
investment in a low income housing tax credit entity. The investment in the
statutory trust depends on the Company’s own cash flows and therefore, the
carrying value is an accurate approximation of fair value. The low income
housing tax credit investment is a recent transaction for which the carrying
value is assumed to be a reasonable estimate of its fair value. These
investments are carried in other assets in the statement of
condition.
 
 Noninterest-bearing
deposits do not pay interest and do not have defined maturity dates. Therefore,
the carrying value is equivalent to fair value for these deposits.
 
 NOW, MMDA
and savings deposits pay interest and generally do not have defined maturity
dates. Although there are some restrictions on access to certain savings
deposits, these restrictions are not assumed to have a material effect on the
value of the deposits. Therefore, the fair value for NOW, MMDA and savings
deposits is assumed to be their carrying value.
 
 Certificates
of deposit pay interest and do have defined maturity dates. The fair value of
certificates of deposit is estimated by discounting the future cash flows, using
current market rates for certificates of deposit of similar
maturities.
 
 Short-term
borrowings are highly liquid and therefore the net book value of the majority of
these financial instruments approximates fair value due to the short term nature
of these items.
 
 The fair
value of other borrowings, which consist of Federal Home Loan Bank advances and
borrowings from correspondent banks is estimated by discounting the future cash
flows, using current market rates for borrowings of similar terms and
maturities.
 
 Junior
subordinated debt is valued by discounting the expected cash flows using a
current market rate for similar instruments.
  16
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 Agency
accounts payable are trade payables of M&F Insurance Group, Inc. due to
insurance companies. These payables are very short term in nature and therefore
the fair value of the payables is assumed to be their carrying value. These
payables are carried in other liabilities in the statement of
condition.
 
 Accrued
interest payable is short-term in nature and therefore the fair value is assumed
to be the carrying value.
 
 Commitments
to extend credit and letters of credit are valued based on the fees charged to
enter into similar credit arrangements.
 
 Mortgage
origination and sale commitments are considered derivatives and are therefore
carried at fair market value with the changes in market value recorded in
mortgage banking income. Mortgage-related commitments with positive values are
carried in other assets and those with negative balances are carried in other
liabilities in the statement of condition. Mortgage derivatives are valued using
a combination of market discount rates, dealer quotes, estimated servicing
values and pull-through rates.
 
 Note
3:  Investment Securities and Derivatives
 
 The
following is a summary of the amortized cost and fair value of securities
available for sale at September 30, 2010, December 31, 2009 and September 30,
2009:
 
 Amortized
                  
                  
                  Gross Unrealized
                  
                  
                  Fair(Dollars in thousands)
                  
                  Cost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueSeptember
      30, 2010:U.S.
      Government sponsored entities
                  
                  $
                  62,192
                  
                  
                  $
                  1,290
                  
                  
                  $
                  -
                  
                  
                  $
                  63,482Mortgage-backed
      investments
                  
                  
                  154,482
                  
                  
                  
                  5,984
                  
                  
                  
                  10
                  
                  
                  
                  160,456Obligations
      of states and political subdivisions
                  
                  
                  43,730
                  
                  
                  
                  2,270
                  
                  
                  
                  8
                  
                  
                  
                  45,992Collateralized
      debt obligations
                  
                  
                  3,768
                  
                  
                  
                  -
                  
                  
                  
                  2,963
                  
                  
                  
                  805Other
      debt securities
                  
                  
                  1,616
                  
                  
                  
                  116
                  
                  
                  
                  -
                  
                  
                  
                  1,732$
                  265,788
                  
                  
                  $
                  9,660
                  
                  
                  $
                  2,981
                  
                  
                  $
                  272,467December
      31, 2009:U.S.
      Treasury securities
                  
                  $
                  503
                  
                  
                  $
                  14
                  
                  
                  $
                  -
                  
                  
                  $
                  517U.S.
      Government sponsored entities
                  
                  
                  54,746
                  
                  
                  
                  489
                  
                  
                  
                  74
                  
                  
                  
                  55,161Mortgage-backed
      investments
                  
                  
                  162,647
                  
                  
                  
                  5,300
                  
                  
                  
                  72
                  
                  
                  
                  167,875Obligations
      of states and political subdivisions
                  
                  
                  55,153
                  
                  
                  
                  1,533
                  
                  
                  
                  100
                  
                  
                  
                  56,586Collateralized
      debt obligations
                  
                  
                  4,171
                  
                  
                  
                  -
                  
                  
                  
                  3,091
                  
                  
                  
                  1,080Other
      debt securities
                  
                  
                  2,385
                  
                  
                  
                  101
                  
                  
                  
                  -
                  
                  
                  
                  2,486Equity
      securities
                  
                  
                  865
                  
                  
                  
                  20
                  
                  
                  
                  40
                  
                  
                  
                  845$
                  280,470
                  
                  
                  $
                  7,457
                  
                  
                  $
                  3,377
                  
                  
                  $
                  284,550
 
 September
      30, 2009:U.S.
      Treasury securities
                    
                    $
                    505
                    
                    
                    $
                    18
                    
                    
                    $
                    -
                    
                    
                    $
                    523U.S.
      Government sponsored entities
                    
                    
                    55,157
                    
                    
                    
                    535
                    
                    
                    
                    42
                    
                    
                    
                    55,650Mortgage-backed
      investments
                    
                    
                    174,354
                    
                    
                    
                    6,345
                    
                    
                    
                    52
                    
                    
                    
                    180,647Obligations
      of states and political subdivisions
                    
                    
                    58,927
                    
                    
                    
                    2,185
                    
                    
                    
                    13
                    
                    
                    
                    61,099Collateralized
      debt obligations
                    
                    
                    4,610
                    
                    
                    
                    -
                    
                    
                    
                    2,570
                    
                    
                    
                    2,040Other
      debt securities
                    
                    
                    2,238
                    
                    
                    
                    119
                    
                    
                    
                    -
                    
                    
                    
                    2,357Equity
      securities
                    
                    
                    1,037
                    
                    
                    
                    -
                    
                    
                    
                    48
                    
                    
                    
                    989$
                    296,828
                    
                    
                    $
                    9,202
                    
                    
                    $
                    2,725
                    
                    
                    $
                    303,305
  17
 FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
3:  (Continued)
 
 Provided
below is a summary of securities available for sale which were in an unrealized
loss position and the length of time that individual securities have been in a
continuous loss position at September 30, 2010 and December 31, 2009. Securities
on which we have taken only credit-related other-than-temporary-impairment
(OTTI) write-downs are categorized as being “less than 12 months” or “12 months
or more” in a continuous loss position based on the point in time that the fair
value declined to below the amortized cost basis and not the period of time
since the OTTI write-down.
 
 (Dollars in thousands)
                                
                                Less Than 12 Months
                                
                                
                                12 Months or More
                                
                                
                                TotalFair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                UnrealizedValue
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                LossesSeptember 30, 2010:Mortgage-backed
      investments
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                32
                                
                                
                                $
                                10
                                
                                
                                $
                                32
                                
                                
                                $
                                10Obligations
      of states and political subdivisions
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                333
                                
                                
                                
                                8
                                
                                
                                
                                333
                                
                                
                                
                                8Collateralized
      debt obligations
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                805
                                
                                
                                
                                2,963
                                
                                
                                
                                805
                                
                                
                                
                                2,963$
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                1,170
                                
                                
                                $
                                2,981
                                
                                
                                $
                                1,170
                                
                                
                                $
                                2,981December
      31, 2009:U.S.
      Government sponsored entities
                                
                                $
                                5,093
                                
                                
                                $
                                74
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                5,093
                                
                                
                                $
                                74Mortgage-backed
      investments
                                
                                
                                4,122
                                
                                
                                
                                71
                                
                                
                                
                                76
                                
                                
                                
                                1
                                
                                
                                
                                4,198
                                
                                
                                
                                72Obligations
      of states and political subdivisions
                                
                                
                                2,423
                                
                                
                                
                                40
                                
                                
                                
                                3,087
                                
                                
                                
                                60
                                
                                
                                
                                5,510
                                
                                
                                
                                100Collateralized
      debt obligations
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,080
                                
                                
                                
                                3,091
                                
                                
                                
                                1,080
                                
                                
                                
                                3,091Equity
      securities
                                
                                
                                350
                                
                                
                                
                                8
                                
                                
                                
                                84
                                
                                
                                
                                32
                                
                                
                                
                                434
                                
                                
                                
                                40$
                                11,988
                                
                                
                                $
                                193
                                
                                
                                $
                                4,327
                                
                                
                                $
                                3,184
                                
                                
                                $
                                16,315
                                
                                
                                $
                                3,377
  18
 FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 Note
3:  (Continued)
 
 Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. At September 30,
2010 there was 1 mortgage-backed security with unrealized losses of 12 months or
longer. There were 2 municipal securities with unrealized losses of 12 months or
longer and no municipal securities with unrealized losses less than 12 months.
The unrealized losses associated with the mortgage-backed and municipal
securities were primarily driven by changes in market rates and liquidity and
not due to the credit quality of the securities. Management does not intend to
sell any investment securities that have unrealized losses before the time that
those losses could be recovered. Management has evaluated the investment
securities that have unrealized losses within the framework of the Company’s
liquidity and capital needs as well as its ability to hold those securities over
an extended recovery period. Management’s evaluation involved (1) assessing
whether significant future cash outflows would occur that would require the
liquidation of securities and (2) determining if the balance sheet would need to
be managed or reduced in a way that would require the liquidation of securities
to meet regulatory capital ratio requirements. This analysis was performed to
determine if it was more likely than not that the investments would have to be
sold before their anticipated recoveries. Management determined that it was not
more likely than not that the investments would have to be disposed of prior to
their anticipated recoveries. In estimating whether there are
other-than-temporary impairment losses on debt securities management considers
(1) the length of time and extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, (3)
historical cash flows and economic factors that could detrimentally affect those
cash flows and (4) changes in credit ratings of the issuers.
 
 There are
five collateralized debt obligations that represent the majority of unrealized
losses in the investment portfolio. These obligations are secured by commercial
bank trust preferred securities. The impairments have arisen due to a virtual
trading halt related to the liquidity crisis in corporate debt, and the effects
of the sub-prime mortgage crisis and the resulting economic deterioration and
ongoing recession on the financial stability of financial institution issuers of
the trust preferred collateral. In December 2008, these CDOs were downgraded to
below investment grade by Moody’s. During 2008 and 2009 several banks that had
issued trust preferred securities that were held as collateral in some of the
CDOs were closed by federal regulators. These defaults and the credit
downgrades, accompanied by interest deferrals by several other bank issuers,
resulted in reductions in fair value estimates as credit assumptions had to be
revised. Management evaluated these instruments for impairment as of each
quarter end during 2009 and 2010 within the accounting guidelines for
determining impairments for beneficial interests using the discounted cash flow
approach prescribed, which required Management to make assumptions concerning
the estimates of the ultimate collectability of the contractual cash flows of
the beneficial interests owned. These estimates depend on the expected cash
flows that the beneficial interest issuer will receive on its investments in the
trust preferred securities of the commercial bank investees. The ability of the
banks that issued trust preferred securities to the beneficial interest issuer
to pay their obligations was determined based on an analysis of the financial
condition of the banks. This analysis resulted in an estimate of the timing and
amount of cash flows derived from a determination of how many would default on
their obligations and how many would eventually pay off their obligations and
the timing of those events. Those estimated cash flows would first pay off more
senior beneficial interests if certain collateral coverage ratios are not
maintained, with the remaining amounts eventually flowing through to the
interests owned by the Company. Based on this type of analysis for each
beneficial interest issuer, the cash flows of each of the five beneficial
interests owned by the Company were projected and discounted to their present
values and compared to the amortized cost book values of the interests. This
analysis resulted in a determination that other-than-temporary impairment (OTTI)
conditions existed for one of the securities at June 30, 2009. By December 31,
2009 all five of the securities had incurred other-than-temporary impairment
charges. During 2010, four of the securities incurred additional OTTIs. The
unrealized losses by individual security in the CDO portfolio as of September
30, 2010 ranged from 70% of amortized cost to 84% of amortized
cost.
  19
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
3:  (Continued)
 
 The
following table provides a rollforward of the cumulative activity related to
credit losses on debt securities for which a portion of an other-than-temporary
impairment was recognized in other comprehensive income.
 
 (Dollars in thousands)
                      
                      Three Months Ended
                        September 30
                      
                      
                      Nine Months Ended
                        September 302010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Beginning
      balance
                      
                      $
                      1,195
                      
                      
                      $
                      175
                      
                      
                      $
                      829
                      
                      
                      $
                      -OTTI
      credit losses on securities not previously impaired
                      
                      
                      -
                      
                      
                      
                      237
                      
                      
                      
                      -
                      
                      
                      
                      412OTTI
      credit losses on previously impaired securities
                      
                      
                      37
                      
                      
                      
                      -
                      
                      
                      
                      403
                      
                      
                      
                      -Ending
      balance
                      
                      $
                      1,232
                      
                      
                      $
                      412
                      
                      
                      $
                      1,232
                      
                      
                      $
                      412
 
 The fair
values of our investment securities could decline in the future if the
underlying performance of the collateral for the trust preferred CDOs
deteriorates and credit enhancements in the form of seniority in the cash flow
waterfalls do not provide sufficient protection to our contractual principal and
interest. As a result, there is a risk that additional OTTI may occur in the
future given the current economic environment.
 
 The
following is a summary of gains and losses on securities available for
sale:
 
 (Dollars in thousands)
                  
                  Three Months Ended September 30
                  
                  
                  Nine Months Ended September 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Proceeds
      from sales
                  
                  $
                  7,493
                  
                  
                  $
                  12,292
                  
                  
                  $
                  68,188
                  
                  
                  $
                  14,127Gross
      realized gains
                  
                  
                  4
                  
                  
                  
                  450
                  
                  
                  
                  1,807
                  
                  
                  
                  451Gross
      realized losses
                  
                  
                  -
                  
                  
                  
                  9
                  
                  
                  
                  91
                  
                  
                  
                  9Net
      gains from sales
                  
                  $
                  4
                  
                  
                  $
                  441
                  
                  
                  $
                  1,716
                  
                  
                  $
                  442Gross
      recognized losses related to the credit component of other- than-temporary
      impairments
                  
                  $
                  37
                  
                  
                  $
                  237
                  
                  
                  $
                  403
                  
                  
                  $
                  412
 
 Securities
with a carrying value totaling $226.369 million at September 30, 2010 and
$264.185 million at December 31, 2009 were pledged to secure public deposits,
short-term borrowings and for other purposes required or permitted by
law.
 
 The
amortized cost and fair values of debt securities available for sale at
September 30, 2010, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay certain obligations with, or without, call or prepayment
penalties. Equity securities are not included since they have no stated
maturity. Mortgage-backed securities receive monthly payments based on the cash
flows of the underlying collateral. Therefore, their stated maturities do not
represent the timing of principal amounts received and no maturity distributions
are shown for these securities.
 
 Amortized
                  
                  
                  Fair(Dollars in
      thousands)
                  
                  Cost
                  
                  
                  ValueOne
      year or less
                  
                  $
                  32,106
                  
                  
                  $
                  32,443After
      one through five years
                  
                  
                  59,648
                  
                  
                  
                  61,852After
      five through ten years
                  
                  
                  14,917
                  
                  
                  
                  16,003After
      ten years
                  
                  
                  4,635
                  
                  
                  
                  1,713111,306
                  
                  
                  
                  112,011Mortgage-backed
      investments
                  
                  
                  154,482
                  
                  
                  
                  160,456$
                  265,788
                  
                  
                  $
                  272,467
  20
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
3:  (Continued)
 
 Derivatives
 
 The
Company enters into interest rate lock agreements related to mortgage loan
originations with customers. The Company also enters into forward sale
agreements with mortgage investors. The interest rate lock agreements, which are
written options, and the forward sale agreements are derivatives and are carried
at fair value on the consolidated statements of condition with changes in fair
value being recorded in earnings for the period.
 
 The
following table summarizes these instruments, which are considered derivatives
not designated as hedges:
 
 (Dollars in thousands)
                  
                  September 30, 2010
                  
                  
                  December 31, 2009Notional
                  
                  
                  Positive
                  
                  
                  Negative
                  
                  
                  Notional
                  
                  
                  Positive
                  
                  
                  NegativeInstrument
                  
                  Amount
                  
                  
                  Fair Value
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair Value
                  
                  
                  Fair ValueForward
      sale agreements
                  
                  $
                  7,054
                  
                  
                  $
                  18
                  
                  
                  $
                  18
                  
                  
                  $
                  3,895
                  
                  
                  $
                  77
                  
                  
                  $
                  -Written
      interest rate options (locks)
                  
                  
                  6,551
                  
                  
                  
                  9
                  
                  
                  
                  26
                  
                  
                  
                  7,108
                  
                  
                  
                  8
                  
                  
                  
                  1
 
 Derivatives
with positive fair values are recorded as other assets and derivatives with
negative fair values are recorded as other liabilities in the consolidated
statements of condition.
 
 Amounts
included in the consolidated statements of operations related to non-hedging
mortgage banking-related derivative instruments were as follows:
 
 (Dollars in thousands)
                    
                    Three Months Ended September 30
                    
                    
                    Nine Months Ended September 302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Forward
      sale contracts:Recorded
      in mortgage banking income
                    
                    $
                    (7
                    )
                    
                    $
                    (13
                    )
                    
                    $
                    (77
                    )
                    
                    $
                    -Written
      interest rate options (locks)Recorded
      in mortgage banking income
                    
                    
                    (59
                    )
                    
                    
                    (32
                    )
                    
                    
                    72
                    
                    
                    
                    1
  21
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 4:
Loans
 
 The
composition of the loan portfolio is shown in the table below:
 
 (Dollars in thousands)
                  
                  September 30
                  
                  
                  December 312010
                  
                  
                  2009
                  
                  
                  2009Commercial,
      financial and agricultural
                  
                  $
                  130,596
                  
                  
                  $
                  124,836
                  
                  
                  $
                  120,415Non-residential
      real estate
                  
                  
                  626,747
                  
                  
                  
                  677,777
                  
                  
                  
                  643,804Residential
      real estate
                  
                  
                  196,299
                  
                  
                  
                  197,760
                  
                  
                  
                  195,361Home
      equity loans
                  
                  
                  40,523
                  
                  
                  
                  44,250
                  
                  
                  
                  44,560Consumer
      loans
                  
                  
                  45,124
                  
                  
                  
                  44,318
                  
                  
                  
                  44,586Other
      loans
                  
                  
                  7,724
                  
                  
                  
                  10,167
                  
                  
                  
                  9,614Total
      loans
                  
                  $
                  1,047,013
                  
                  
                  $
                  1,099,108
                  
                  
                  $
                  1,058,340
 
 The Bank
uses loans as collateral for borrowings at the Federal Reserve Bank and a
Federal Home Loan Bank. Approximately $17.791 million of commercial and consumer
loans were pledged to a line of credit with the Federal Reserve Bank at
September 30, 2010. Approximately $258.515 million of individual real
estate-secured loans were pledged to the Federal Home Loan Bank at September 30,
2010.
 
 The
following table is a summary of the activity in the allowance for loan losses
for the second quarter and year-to-date periods ending September 30, 2010 and
2009.
 
 (Dollars
      in thousands)
                  
                  Three Months Ended September
    30
                  
                  
                  Nine Months Ended September
    302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  18,301
                  
                  
                  $
                  31,323
                  
                  
                  $
                  24,014
                  
                  
                  $
                  24,918Loans
      charged off
                  
                  
                  (1,485
                  )
                  
                  
                  (3,597
                  )
                  
                  
                  (12,794
                  )
                  
                  
                  (26,684
                  )Charge
      offs resulting from write-downs of loans transferred to held for sale
      status
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (325
                  )
                  
                  
                  -Recoveries
                  
                  
                  981
                  
                  
                  
                  164
                  
                  
                  
                  2,242
                  
                  
                  
                  621Net
      charge-offs
                  
                  
                  (504
                  )
                  
                  
                  (3,433
                  )
                  
                  
                  (10,877
                  )
                  
                  
                  (26,063
                  )Provision
      for loan losses
                  
                  
                  2,280
                  
                  
                  
                  4,805
                  
                  
                  
                  6,940
                  
                  
                  
                  33,840Ending
      balance
                  
                  $
                  20,077
                  
                  
                  $
                  32,695
                  
                  
                  $
                  20,077
                  
                  
                  $
                  32,695
 
 The
magnitude of the quarterly allowance depends upon the effect of economic and
market factors on collateral values, the state of the economies local to our
customers, historical loss patterns for different types of loans, the timing and
extent of downgrades of customer borrowings as well as other qualitative
factors.
  22
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
4:  (Continued)
 
 Loans are
placed on nonaccrual status when, in management’s opinion, the borrowers may be
unable to meet their payment obligations, which typically occurs when principal
or interest payments are more than 90 days past due. The following table shows
overall statistics for non-performing loans and other assets of the
Company:
 
 (Dollars in thousands)
                  
                  September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Nonaccrual
      loans
                  
                  $
                  37,082
                  
                  
                  $
                  44,549Other
      real estate owned
                  
                  
                  38,631
                  
                  
                  
                  23,578Total
      non-performing credit-related assets
                  
                  $
                  75,713
                  
                  
                  $
                  68,127Accruing
      loans past due 90 days or more
                  
                  $
                  858
                  
                  
                  $
                  2,479Loans
      restructured and in compliance with modified terms
                  
                  $
                  18,518
                  
                  
                  $
                  4,620
 
 Loans are
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due in
accordance with the original contractual terms of the loan agreement, including
scheduled principal and interest payments. If a loan is impaired, a specific
valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s
existing rate or at the fair value of the collateral if repayment is expected
solely from the collateral. Interest payments on impaired loans are typically
applied to principal unless collectability of the principal amount is reasonably
assured, in which case interest is recognized on a cash basis. Impaired loans,
or portions thereof, are charged off when deemed uncollectible. Restructured
loans are considered to be impaired loans. A troubled debt restructuring occurs
when a creditor for economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it would not otherwise
consider. That concession either stems from an agreement between the creditor
and the debtor or is imposed by law or a court.
 
 The
following table shows an impaired loan summary for the Company:
 
 (Dollars in thousands)
                  
                  September 30, 2010
                  
                  
                  December 31, 2009Restructured
      loans with an allowance
                  
                  $
                  4,624
                  
                  
                  $
                  3,783Other
      impaired loans with an allowance
                  
                  
                  35,315
                  
                  
                  
                  40,897Restructured
      loans without an allowance
                  
                  
                  13,894
                  
                  
                  
                  837Other
      impaired loans without an allowance
                  
                  
                  66,501
                  
                  
                  
                  94,710Total
      impaired loans
                  
                  $
                  120,334
                  
                  
                  $
                  140,227Allowance
      for restructured loans
                  
                  $
                  921
                  
                  
                  $
                  1,974Allowance
      for other impaired loans
                  
                  $
                  8,139
                  
                  
                  $
                  11,419
 
 The
impaired loan totals consist primarily of collateral-dependent construction and
commercial real estate loans.
  23
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 5:  Goodwill
and Other Intangible Assets
 
 Following
is a summary of intangible assets, net of accumulated amortization, included in
the Consolidated Statements of Condition:
 
 (Dollars in thousands)
                      
                      
                      
                      
                      
                      
                      
                      CustomerCore
                      
                      
                      Renewal
                      
                      
                      Noncompete
                      
                      
                      BankingGoodwill
                      
                      
                      Deposits
                      
                      
                      Lists
                      
                      
                      Agreements
                      
                      
                      CharterBalance
      at December 31, 2008
                      
                      $
                      32,572
                      
                      
                      $
                      5,865
                      
                      
                      $
                      198
                      
                      
                      $
                      39
                      
                      
                      $
                      1,025Amortization
      expense
                      
                      
                      -
                      
                      
                      
                      (319
                      )
                      
                      
                      (7
                      )
                      
                      
                      (7
                      )
                      
                      
                      -Impairment
      charge
                      
                      
                      (15,800
                      )
                      
                      
                      -
                      
                      
                      
                      (191
                      )
                      
                      
                      (32
                      )
                      
                      
                      (1,025
                      )Balance
      at September 30, 2009
                      
                      $
                      16,772
                      
                      
                      $
                      5,546
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Balance
      at December 31, 2009
                      
                      $
                      -
                      
                      
                      $
                      5,439
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Amortization
      expense
                      
                      
                      -
                      
                      
                      
                      (320
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at September 30, 2010
                      
                      $
                      -
                      
                      
                      $
                      5,119
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Estimated amortization
    expenseRemainder
      of 2010
                      
                      
                      
                      
                      
                      $
                      1062011
                      
                      
                      
                      
                      
                      
                      4272012
                      
                      
                      
                      
                      
                      
                      4272013
                      
                      
                      
                      
                      
                      
                      4272014
                      
                      
                      
                      
                      
                      
                      4272015
                      
                      
                      
                      
                      
                      
                      427
 
 Goodwill
and indefinite lived intangible assets are reviewed for impairment at least
annually or when circumstances or events indicate that an impairment may be
evident. Goodwill is tested for impairment annually during the first quarter of
each year. No amortization resulted from the impairment tests performed during
the first quarters 2009 and 2008. Due to a continued decrease in the Company’s
stock price coupled with increased first quarter loan impairments, an additional
goodwill impairment test was performed at March 31, 2009. Step 1 of the test
indicated that the net assets of the community banking unit of the Company had a
fair value of less than their book value. Therefore, Step 2 was performed to
determine if goodwill was an impaired asset in the allocation of the value of
the community banking unit through the allocation of fair values to all of the
identifiable assets and liabilities, both recorded and unrecorded, of the unit.
The completion of this step resulted in the carrying value of goodwill exceeding
its implied fair value by $15.800 million. Therefore, a goodwill impairment
charge of $15.800 million was recorded during the first quarter of 2009. An
increase in loan impairments in the fourth quarter of 2009 resulting in loan
loss provisions of $10.956 million in excess of third quarter provisions and a
decrease of over 60% in the stock price from the end of the first quarter to the
end of the year prompted the Company to test goodwill for impairment at December
31, 2009. Step 1 of the test indicated that the net assets of the community
banking unit of the Company had a fair value of less than their book value.
Therefore, Step 2 was again required to determine if the goodwill asset was
impaired. The Step 2 analysis resulted in no implied fair value for goodwill.
Therefore, the remaining goodwill asset of $16.772 million was written off as an
impairment charge during the fourth quarter of 2009.
 
 The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. Concurrent with the March
31, 2009 test of goodwill, these intangible assets with determinable useful
lives were tested for impairment. Based on an analysis of expected cash flows,
management determined that the renewal values and the value of the noncompete
agreements were fully impaired. Therefore, the Company charged $191 thousand for
customer renewal lists and $32 thousand for noncompete agreements to intangible
asset amortization during the first quarter of 2009 to fully write off the
remaining balances of the assets.
 
 The
Company acquired a Florida banking charter in a transaction with Ameris Bancorp
of Moultrie, Georgia, in November 2006, for $1.025 million. The charter was
being accounted for as an indefinite-lived intangible asset and therefore was
not being amortized. The banking charter is tested for impairment annually and
when circumstances arise or events occur that indicate that the asset may be
impaired. The banking charter was tested for impairment at December 31, 2008,
with no amortization being required. The banking charter was subsequently tested
as of March 31, 2009 concurrent with the goodwill impairment test. The
significant slowdown in the economy, especially in areas with historically heavy
construction activity, throughout 2008 and into 2009 affected the Company’s
ability to grow its business in the Florida panhandle. The lack of interest in
the Florida markets as a means of expansion by commercial banks and loan
impairments related to the Florida markets were key factors in determining the
value of the Florida banking charter. The charter, with a recorded value of
$1.025 million, was determined to be fully impaired and was written off in the
first quarter of 2009.
  24
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 6:  Variable
Interest Entity and Borrowing Arrangements
 
 The
following is a summary of other borrowings at September 30, 2010 and 2009 and
December 31, 2009:
 
 (Dollars in thousands)
                      
                      September 30
                      
                      
                      December 312010
                      
                      
                      2009
                      
                      
                      2009Company’s
      line of credit in the amount of $5,000,000, maturing inFebruary
      2011; secured by approximately 29% of the Bank’s commonstock;
      interest payable quarterly at the prime rate with a floor of
      3.50%
                      
                      $
                      1,916
                      
                      
                      $
                      1,916
                      
                      
                      $
                      1,916Bank’s
      advances from Federal Home Loan Banks
                      
                      
                      48,225
                      
                      
                      
                      131,835
                      
                      
                      
                      120,594$
                      50,141
                      
                      
                      $
                      133,751
                      
                      
                      $
                      122,510Company’s
      junior subordinated debentures, interest payable quarterly at 6.44%
      through March 2011, payable quarterly at 90-day LIBOR plus 1.33% through
      March 2036; redeemable after March 2011
                      
                      $
                      30,928
                      
                      
                      $
                      30,928
                      
                      
                      $
                      30,928
 
 The
Company’s correspondent line of credit contains certain restrictive covenants
related to capital ratios, asset quality, dividends and supervisory actions by
the Company’s regulators. The Company executed an informal agreement with the
Federal Reserve Bank of St. Louis in November 2009, the occurrence of which was
an event of default under the Loan Agreement. The lender has modified the terms
of the line of credit thereby extending the term, modifying the financial
(capital ratio) covenant, waiving the supervisory action and dividend covenants
and modifying the asset quality covenant. The Company was in compliance with the
modified financial and asset quality covenants at September 30, 2010. Under the
modification, the Lender has agreed to a waiver of the covenant violations and
events of default until February 28, 2011.
 
 The Bank
has advances and letters of credit from the Federal Home Loan Bank of Dallas
(FHLB) collateralized by real estate-secured loans. The Bank must pledge
collateral to obtain advances from the FHLB. Based on the amount of collateral
pledged as of September 30, 2010 the Bank had approximately $734 thousand in
available credit although any new advances could only be received after approval
by the FHLB.
 
 The Bank
has a line of credit with the Federal Reserve Discount Window collateralized by
commercial and consumer loans. The bank had a line of credit of approximately
$11.564 million at September 30, 2010, all of which was available.
 
 In
February 2006, the Company issued $30.928 million in fixed/floating rate junior
subordinated deferrable interest debentures to First M&F Statutory Trust I.
The Company received $30.000 million in cash and $928 thousand of common
securities from the Trust. The debentures mature in March 2036 and interest is
payable quarterly.
 
 First
M&F Statutory Trust I, which is a wholly owned financing subsidiary of the
Company for regulatory and legal purposes, is a variable interest entity. A
determination has been made that the Company, since its equity interest is not
at risk, is not the primary beneficiary and therefore, the Trust is not
consolidated with the Company’s financial statements.
  25
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 7:  Preferred
Stock and Common Stock Warrant
 
 On
February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative
Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S.
Treasury as part of its participation in the Capital Purchase Program.
Concurrent with the issuance of the preferred stock, the Company also issued a
ten-year warrant to purchase up to 513,113 shares of the Company’s common stock
at an exercise price of $8.77 per share to the U. S. Treasury. The Company
received $30.000 million from the U. S. Treasury in exchange for the preferred
stock and common stock warrant. Cumulative dividends on the Class B, Series A
Preferred Stock accrued on the $1,000 liquidation preference at a rate of 5% per
annum.
 
 On
September 29, 2010 the Company redeemed the Class B, Series A Preferred Stock by
issuing 30,000 shares of Class B, Series CD Preferred Stock issued pursuant to
the U. S. Treasury Community Development Capital Initiative. The book value of
the Class B, Series A Preferred Stock on the exchange date was $29.026 million.
The fair value of the Class B, Series CD Preferred Stock issued on the exchange
date was $16.159 million, resulting in a gain of $12.867 million which was
recorded as a credit to retained earnings.
 
 Cumulative
dividends on the Class B, Series CD Preferred Stock accrue on the $1,000
liquidation preference at a rate of 2% per annum for the first eight years, and
at a rate of 9% per annum thereafter but are paid only if, as, and when declared
by the Company’s Board of Directors. The Company’s banking subsidiary must be
re-certified as a Community Development Financial Institution (CDFI) by the
Community Development Financial Institution Fund of the U. S. Treasury
Department at three-year intervals. In the event that the banking subsidiary
continues to be uncertified for 180 days, the dividend rate shall increase to
5%. If the banking subsidiary continues to be uncertified for an additional 90
days, then the dividend rate shall increase to 9% until the subsidiary becomes
certified, at which time the dividend rate shall revert to its original 2% per
annum. The Class B, Series CD Preferred Stock has no maturity date and ranks
senior to the Common Stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up
of the Company. The Class B, Series CD Preferred Stock is generally
non-voting.
 
 The fair
value of the Class B, Series CD Preferred Stock was determined using a
discounted cash flow analysis. Cash flows under scenarios of continuing CDFI
certification and loss of CDFI certification, weighted by estimated
probabilities, were used. Terminal values were calculated as perpetuities on the
dates that the dividend rates would accelerate to 9% under the different
scenarios. All cash flows were discounted at a market rate of 10%.
 
 Accretion
of the discount associated with the preferred stock is recognized as an increase
to preferred stock dividends in determining net income available to common
shareholders. The discount on the Class B, Series A Preferred Stock was being
amortized over a five-year period using the effective yield method. The discount
on the Class B, Series CD Preferred Stock is being amortized over an eight-year
period. The discount recognized on the Class B, Series A Preferred Stock was
$188 thousand during the first nine months of 2010 and $141 thousand during the
first nine months of 2009. The discount recognized on the Class B, Series CD
Preferred Stock was $5 thousand during the first nine months of
2010.
  26
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 8:  Pension
and Other Employee Benefit Plans
 
 As
discussed in Note 18 to the December 31, 2009 financial statements, the Bank has
a defined benefit pension plan covering substantially all full time employees of
the Bank and its subsidiaries. The following table provides a summary of the
components of the Unamortized Pension Costs recognized in stockholders’ equity
as of September 30, 2010 and December 31, 2009:
 
 (Dollars in thousands)
                  
                  Balance
                  
                  
                  2010
                  
                  
                  Balance12/31/09
                  
                  
                  Amortization
                  
                  
                  09/30/10Unamortized
      transition asset
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Unamortized
      prior service cost
                  
                  
                  (62
                  )
                  
                  
                  28
                  
                  
                  
                  (34
                  )Unamortized
      actuarial loss
                  
                  
                  3,538
                  
                  
                  
                  (663
                  )
                  
                  
                  2,8753,476
                  
                  
                  
                  (635
                  )
                  
                  
                  2,841Deferred
      taxes
                  
                  
                  (1,297
                  )
                  
                  
                  237
                  
                  
                  
                  (1,060
                  )Net
      unamortized pension costs
                  
                  $
                  2,179
                  
                  
                  $
                  (398
                  )
                  
                  $
                  1,781
 
 The
following is a summary of the components of net periodic benefit costs for the
three and nine-month periods ended September 30, 2010 and 2009:
 
 (Dollars in thousands)
                  
                  Three Months Ended September 30
                  
                  
                  Nine Months Ended September 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Service
      cost
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      cost
                  
                  
                  117
                  
                  
                  
                  122
                  
                  
                  
                  351
                  
                  
                  
                  364Expected
      return on plan assets
                  
                  
                  (132
                  )
                  
                  
                  (118
                  )
                  
                  
                  (396
                  )
                  
                  
                  (352
                  )Amortization
      of transition asset
                  
                  
                  -
                  
                  
                  
                  (2
                  )
                  
                  
                  -
                  
                  
                  
                  (5
                  )Amortization
      of prior service costs
                  
                  
                  (10
                  )
                  
                  
                  (9
                  )
                  
                  
                  (28
                  )
                  
                  
                  (28
                  )Recognized
      actuarial loss
                  
                  
                  221
                  
                  
                  
                  227
                  
                  
                  
                  663
                  
                  
                  
                  679Net
      pension cost
                  
                  $
                  196
                  
                  
                  $
                  220
                  
                  
                  $
                  590
                  
                  
                  $
                  658
 
 The
Company made a $224 thousand contribution to the pension plan during the second
quarter of 2010. It did not make any contributions to the pension plan during
the first nine months of 2009.
 
 The
Company made $75 thousand in contributions to the ESOP and $253 thousand in
matching contributions to the 401k plan during the first nine months of 2010.
The Company made $75 thousand in contributions to the ESOP and $294 thousand in
matching contributions to the 401k plan during the first nine months of
2009.
 
 The
Company has a nonqualified deferred compensation plan for certain senior
officers. Participants deferred $37 thousand of compensation and received $18
thousand in distributions during the first nine months of 2010. Participants
deferred $57 thousand of compensation and received $64 thousand in distributions
during the first nine months of 2009. Employee benefit expenses include charges
for earnings increases of $9 thousand for the first nine months of 2010 and
credits for earnings declines attributed to the participants’ accounts of $39
thousand for the first nine months of 2009. The plan incurred $2 thousand of
expenses during the first nine months of 2010 and $2 thousand during the first
nine months of 2009. Liabilities of the plan were $431 thousand at September 30,
2010 and $340 thousand at September 30, 2009, substantially all of which were
vested.
  27
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
9:  Share-based Compensation
 
 The
Company uses the fair value method of accounting for stock-based compensation.
The fair value of stock options is estimated at the date of grant using the
Black-Scholes option pricing model.
 
 The
following table is a summary of stock awards activity:
 
 2005 Plan
                      
                      
                      1999 PlanRestricted Stock
                      
                      
                      Stock Options
                      
                      
                      Stock OptionsWeightedAverageShares
                      
                      
                      
                      
                      
                      Grant
                      
                      
                      
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedAvailable
                      
                      
                      Number
                      
                      
                      Date
                      
                      
                      Number
                      
                      
                      Average
                      
                      
                      Number
                      
                      
                      AverageFor
                      
                      
                      of
                      
                      
                      Fair
                      
                      
                      Of
                      
                      
                      Exercise
                      
                      
                      Of
                      
                      
                      ExerciseGrant
                      
                      
                      Shares
                      
                      
                      Value
                      
                      
                      Shares
                      
                      
                      Price
                      
                      
                      Shares
                      
                      
                      PriceJanuary
      1, 2009
                      
                      
                      576,984
                      
                      
                      
                      106,250
                      
                      
                      $
                      16.823
                      
                      
                      
                      12,000
                      
                      
                      $
                      16.004
                      
                      
                      
                      119,900
                      
                      
                      $
                      15.995Awards
      Granted
                      
                      
                      (4,000
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,000
                      
                      
                      
                      5.140
                      
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      -
                      
                      
                      
                      (6,000
                      )
                      
                      
                      16.855
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeitures
                      
                      
                      23,250
                      
                      
                      
                      (23,250
                      )
                      
                      
                      16.754
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (98,300
                      )
                      
                      
                      16.195September
      30, 2009
                      
                      
                      596,234
                      
                      
                      
                      77,000
                      
                      
                      $
                      16.841
                      
                      
                      
                      16,000
                      
                      
                      $
                      13.288
                      
                      
                      
                      21,600
                      
                      
                      $
                      15.087January
      1, 2010
                      
                      
                      596,234
                      
                      
                      
                      77,000
                      
                      
                      $
                      16.841
                      
                      
                      
                      16,000
                      
                      
                      $
                      13.288
                      
                      
                      
                      21,600
                      
                      
                      $
                      15.087Awards
      Granted
                      
                      
                      (2,000
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,000
                      
                      
                      
                      4.890
                      
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeitures
                      
                      
                      12,400
                      
                      
                      
                      (11,000
                      )
                      
                      
                      16.060
                      
                      
                      
                      (1,400
                      )
                      
                      
                      16.051
                      
                      
                      
                      (200
                      )
                      
                      
                      17.000Expired
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,600
                      )
                      
                      
                      12.127September
      30, 2010
                      
                      
                      606,634
                      
                      
                      
                      66,000
                      
                      
                      $
                      16.971
                      
                      
                      
                      16,600
                      
                      
                      $
                      12.043
                      
                      
                      
                      15,800
                      
                      
                      $
                      16.018Shares
      exercisable at September 30, 2010
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,600
                      
                      
                      $
                      15.307
                      
                      
                      
                      15,800
                      
                      
                      $
                      16.018
 
 The
Company estimates a forfeiture rate of 9.45% (1.89% annual rate) for stock
options issued to employees and a forfeiture rate of 5.45% (1.09% annual rate)
for stock options issued to directors in determining net compensation costs. At
September 30, 2010, there were $16 thousand in unrecognized compensation costs
related to stock option awards.
 
 The
Company has issued restricted stock awards to certain executives and senior
officers. The awards vest over periods of one to seven years and are forfeited
in their entirety if the officer leaves the Company before the end of the
vesting term. Additionally the restricted shares include a performance condition
that may accelerate vesting at the achievement of a diluted earnings per share
and net income target. Non-achievement of the performance condition during the
vesting period would not prevent vesting of the shares. Dividends are paid
quarterly to restricted stock grantees. At September 30, 2010, there were $361
thousand in unrecognized compensation costs. The unrecognized costs at September
30, 2010, are expected to be recognized over a weighted-average period of 2.4
years. The Company estimates that 4.00% (.57% annual rate) of the nonvested
shares will be forfeited in determining net compensation expenses recognized. In
May 2009, 6,000 shares of restricted stock with a fair value of $26 thousand
became fully vested and outstanding.
 
 In July
2010 the Board of Directors approved the reservation of 1,000,000 shares of
authorized, unissued shares for payment of shares in lieu of cash for directors’
fees earned for 2010 and beyond. Directors individually elect a percentage of
their compensation, not less than 50%, to be received in common stock with the
balance of the fees being paid in cash each quarter. For the first half of 2010,
the Board authorized the payment of 18,681 shares in lieu of cash director fees.
For the third quarter, 9,525 shares were paid to directors in lieu of
fees.
  28
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
10:  Accumulated Other Comprehensive Income
 
 The
following is a summary of the gross amounts of accumulated other comprehensive
income and the related income tax effects:
 
 (Dollars in
      thousands)
                  
                  Gross
                  
                  
                  Tax
                  
                  
                  NetSeptember
      30, 2010:Net
      unrealized gain on securities available for sale
                  
                  $
                  9,640
                  
                  
                  $
                  3,595
                  
                  
                  $
                  6,045Net
      unrealized loss on other-than-temporarily impaired securities available
      for sale
                  
                  
                  (2,963
                  )
                  
                  
                  (1,105
                  )
                  
                  
                  (1,858
                  )Net
      unamortized pension costs
                  
                  
                  (2,841
                  )
                  
                  
                  (1,060
                  )
                  
                  
                  (1,781
                  )$
                  3,836
                  
                  
                  $
                  1,430
                  
                  
                  $
                  2,406December
      31, 2009:Net
      unrealized gain on securities available for sale
                  
                  $
                  7,171
                  
                  
                  $
                  2,675
                  
                  
                  $
                  4,496Net
      unrealized loss on other-than-temporarily impaired securities available
      for sale
                  
                  
                  (3,091
                  )
                  
                  
                  (1,153
                  )
                  
                  
                  (1,938
                  )Net
      unamortized pension costs
                  
                  
                  (3,476
                  )
                  
                  
                  (1,297
                  )
                  
                  
                  (2,179
                  )$
                  604
                  
                  
                  $
                  225
                  
                  
                  $
                  379September
      30, 2009:Net
      unrealized gain on securities available for sale
                  
                  $
                  7,763
                  
                  
                  $
                  2,894
                  
                  
                  $
                  4,869Net
      unrealized loss on other-than-temporarily impaired securities available
      for sale
                  
                  
                  (1,286
                  )
                  
                  
                  (480
                  )
                  
                  
                  (806
                  )Net
      unamortized pension costs
                  
                  
                  (3,776
                  )
                  
                  
                  (1,408
                  )
                  
                  
                  (2,368
                  )$
                  2,701
                  
                  
                  $
                  1,006
                  
                  
                  $
                  1,695
 
 Note
11:  Regulatory Matters
 
 The
Company and its subsidiary bank are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, specific capital
requirements that involve quantitative measures of assets, liabilities and
certain off-balance-sheet items, calculated under regulatory accounting
practices must be met. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table below) of
Total Capital and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2010, that all
capital adequacy requirements have been met.
 
 As of
September 30, 2010, the most recent notification by the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
  29
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
11:  (Continued)
 
 The
Company's and Bank's actual capital amounts and ratios as of September 30, 2010,
and December 31, 2009, are also presented in the table:
 
 (Dollars in thousands)
                    
                    Actual
                    
                    
                    Minimum Capital
                    
                    
                    Well CapitalizedAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioSeptember
      30, 2010:Total
      capital (to risk weighted assets):Company
                    
                    $
                    138,353
                    
                    
                    
                    11.7
                    %
                    
                    $
                    94,930
                    
                    
                    
                    8.0
                    %
                    
                    $
                    -
                    
                    
                    
                    -Bank
                    
                    
                    137,403
                    
                    
                    
                    11.6
                    %
                    
                    
                    94,849
                    
                    
                    
                    8.0
                    %
                    
                    
                    118,561
                    
                    
                    
                    10.0
                    %Tier
      I capital (to risk weighted assets):Company
                    
                    
                    123,455
                    
                    
                    
                    10.4
                    %
                    
                    
                    47,465
                    
                    
                    
                    4.0
                    %
                    
                    
                    -
                    
                    
                    
                    -Bank
                    
                    
                    122,518
                    
                    
                    
                    10.3
                    %
                    
                    
                    47,425
                    
                    
                    
                    4.0
                    %
                    
                    
                    71,137
                    
                    
                    
                    6.0
                    %Tier
      I capital (to average assets):Company
                    
                    
                    123,455
                    
                    
                    
                    8.0
                    %
                    
                    
                    61,512
                    
                    
                    
                    4.0
                    %
                    
                    
                    -
                    
                    
                    
                    -Bank
                    
                    
                    122,518
                    
                    
                    
                    8.0
                    %
                    
                    
                    61,487
                    
                    
                    
                    4.0
                    %
                    
                    
                    76,858
                    
                    
                    
                    5.0
                    %December
      31, 2009:Total
      capital (to risk weighted assets):Company
                    
                    $
                    133,574
                    
                    
                    
                    11.1
                    %
                    
                    $
                    96,374
                    
                    
                    
                    8.0
                    %
                    
                    $
                    -
                    
                    
                    
                    -Bank
                    
                    
                    130,960
                    
                    
                    
                    10.9
                    %
                    
                    
                    96,293
                    
                    
                    
                    8.0
                    %
                    
                    
                    120,366
                    
                    
                    
                    10.0
                    %Tier
      I capital (to risk weighted assets):Company
                    
                    
                    118,405
                    
                    
                    
                    9.8
                    %
                    
                    
                    48,187
                    
                    
                    
                    4.0
                    %
                    
                    
                    -
                    
                    
                    
                    -Bank
                    
                    
                    115,803
                    
                    
                    
                    9.6
                    %
                    
                    
                    48,147
                    
                    
                    
                    4.0
                    %
                    
                    
                    72,220
                    
                    
                    
                    6.0
                    %Tier
      I capital (to average assets):Company
                    
                    
                    118,405
                    
                    
                    
                    7.1
                    %
                    
                    
                    66,346
                    
                    
                    
                    4.0
                    %
                    
                    
                    -
                    
                    
                    
                    -Bank
                    
                    
                    115,803
                    
                    
                    
                    7.0
                    %
                    
                    
                    66,339
                    
                    
                    
                    4.0
                    %
                    
                    
                    82,924
                    
                    
                    
                    5.0
                    %
 
 Dividends
paid by the Bank are the primary source of funds available to the Company for
payment of dividends to its shareholders and other cash needs. Applicable
Federal and state statutes and regulations impose restrictions on the amounts of
dividends that may be declared by the Bank. The Bank may also be restricted in
its ability to pay dividends due to regulatory violations cited in an
examination. In addition to the formal statutes and regulations, regulatory
authorities also consider the Bank’s ability to produce current earnings and the
adequacy of the Bank's total capital in relation to its assets, deposits and
other such items, and as a result, capital adequacy considerations could further
limit the availability of dividends from the Bank.
 
 The Bank
is required to get prior approval from its primary regulators, the Federal
Deposit Insurance Corporation and the State of Mississippi Department of Banking
and Consumer Finance, to pay dividends to the Company. Said approval was granted
for the third quarter of 2010 and preliminary approval for the fourth quarter of
2010 has been granted based on the current year’s positive earnings of the
Bank.
 
 In
November 2009, the Company entered into an informal agreement with the Federal
Reserve Bank of St. Louis (the “Federal Reserve”). The agreement requires prior
approval by the Federal Reserve of (1) the declaration or payment by the Company
of dividends to shareholders and (2) the payment of interest on outstanding
trust preferred securities and the payment of dividends on outstanding TARP
preferred stock and (3) the incurrence of additional debt. The agreement is not
a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance
Act, as amended. The Federal Reserve has approved, pursuant to the informal
agreement, the common dividends payable to shareholders, the interest payment on
the trust preferred securities and the dividends payable on the TARP preferred
stock for the third and fourth quarters of 2010.
 
 In
September 2010 the Company entered into an exchange transaction with the
Department of the Treasury TARP Community Development Capital Initiative.
Pursuant to the Agreement, the Company issued 30,000 shares of Class B, Series
CD preferred stock bearing an annual dividend rate of 2% and redeemed 30,000
shares of Class B, Series A preferred stock bearing an annual dividend rate of
5%. Under the terms of the Exchange Agreement, the Company may not pay common
dividends in excess of the aggregate per share dividends for the immediately
prior fiscal year. This will limit future dividends to the current rate of $.01
per share per quarter or $.04 per share per year.
  30




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 12:  Income
Taxes
 
 Income
tax expense was as follows:
 
 
 (Dollars in thousands)
                  
                  Three Months Ended September 30
                  
                  
                  Nine Months Ended September 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Current
      income tax expense (benefit)
                  
                  $
                  -
                  
                  
                  $
                  (908
                  )
                  
                  $
                  -
                  
                  
                  $
                  (6,991
                  )Deferred
      income tax expense (benefit)
                  
                  
                  407
                  
                  
                  
                  (229
                  )
                  
                  
                  828
                  
                  
                  
                  (4,398
                  )Total
      income tax expense (benefit)
                  
                  
                  407
                  
                  
                  
                  (1,137
                  )
                  
                  
                  828
                  
                  
                  
                  (11,389
                  )
 
 Net
deferred tax assets totaled $13.186 million at September 30, 2010 and $15.219
million at December 31, 2009. No valuation allowance has been accrued for the
deferred tax assets at September 30, 2010 as management believes that it is more
likely than not that all of the deferred tax assets will be realized in the
foreseeable future. Deferred tax expense for the quarter-to-date and
year-to-date 2010 has been reduced by $83 thousand and $248 thousand
respectively in Federal tax credits related to a low income housing tax credit
investment.
 
 In
connection with its 2009 operating loss, the Company had the following net
operating losses and tax credits available for carryover for Federal income tax
purposes at December 31, 2009:
 
 (Dollars
      in thousands)Amount
                  
                  Expiration DatesNet
      operating loss
                  
                  $
                  14,700
                  
                  2029Tax
      credits
                  
                  
                  208
                  
                  2029
 
 As a
result of an audit of its state tax returns for the years 2005 through 2007 by
the Mississippi State Tax Commission, the Company paid $217 thousand in
assessments in February 2010. The amount paid, included in current income tax
expense, included $163 thousand in assessments and $54 thousand in interest. The
primary issues related to (1) the apportionment of taxable income between state
jurisdictions and (2) the excludable nature of interest income on certain
investment securities issued by Federal government sponsored enterprises. The
change in the calculation of apportioned revenues resulted in amendments of
returns filed with the state of Tennessee. The amended returns related to
Tennessee resulted in refunds receivable for 2005 through 2007 of $129 thousand,
leaving the Company with a net tax expense of $88 thousand related to the
assessment.
 
 The
Company had no material recognized uncertain tax positions as of September 30,
2010, December 31, 2009 or September 30, 2009 and therefore did not have any tax
accruals in 2010 or 2009 related to uncertain positions. The Company is no
longer subject to Federal income tax examinations of tax returns filed for years
before 2006.
 
 31
  FIRST M
& F CORPORATION AND SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 
 Note 13:  Earnings
(Loss) Per Share
 
 The
Company calculates earnings per share using the two-class method. The two-class
method is an earnings allocation formula that determines earnings per share
separately for common stock and participating securities according to dividends
declared and participation rights in undistributed earnings. The Company has
determined that its outstanding non-vested restricted stock awards are
participating securities.
 
 The
calculation of earnings (loss) per share and the reconciliation of earnings
(loss) per share and earnings (loss) per diluted share were as
follows:
 
 (Dollars in thousands, except per share data)
                          
                          Three Months Ended September 30
                          
                          
                          Nine Months Ended September 302010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Net
      income (loss)
                          
                          $
                          1,245
                          
                          
                          $
                          (136
                          )
                          
                          $
                          3,370
                          
                          
                          $
                          (32,488
                          )Preferred
      dividends
                          
                          
                          (441
                          )
                          
                          
                          (435
                          )
                          
                          
                          (1,317
                          )
                          
                          
                          (1,028
                          )Gain
      on exchange of preferred stock
                          
                          
                          12,867
                          
                          
                          
                          -
                          
                          
                          
                          12,867
                          
                          
                          
                          -Net
      income (loss) attributable to common stock
                          
                          
                          13,671
                          
                          
                          
                          (571
                          )
                          
                          
                          14,920
                          
                          
                          
                          (33,516
                          )Net
      income (loss) allocated to common stockholders:Distributed
                          
                          
                          91
                          
                          
                          
                          90
                          
                          
                          
                          272
                          
                          
                          
                          1,360Undistributed
                          
                          
                          13,474
                          
                          
                          
                          (670
                          )
                          
                          
                          14,532
                          
                          
                          
                          (34,527
                          )$
                          13,565
                          
                          
                          $
                          (580
                          )
                          
                          $
                          14,804
                          
                          
                          $
                          (33,167
                          )Weighted-average
      basic common and participating shares outstanding
                          
                          
                          9,153,769
                          
                          
                          
                          9,157,705
                          
                          
                          
                          9,146,528
                          
                          
                          
                          9,161,596Less:
      weighted average participating restricted shares
    outstanding
                          
                          
                          66,000
                          
                          
                          
                          88,359
                          
                          
                          
                          70,974
                          
                          
                          
                          95,547Weighted-average
      basic shares outstanding
                          
                          
                          9,087,769
                          
                          
                          
                          9,069,346
                          
                          
                          
                          9,075,554
                          
                          
                          
                          9,066,049Basic
      net income (loss) per share
                          
                          $
                          1.49
                          
                          
                          $
                          (.06
                          )
                          
                          $
                          1.63
                          
                          
                          $
                          (3.66
                          )Weighted-average
      basic common and participating shares outstanding
                          
                          
                          9,153,769
                          
                          
                          
                          9,157,705
                          
                          
                          
                          9,146,528
                          
                          
                          
                          9,161,596Add:
      share-based options and stock warrant
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -9,153,769
                          
                          
                          
                          9,157,705
                          
                          
                          
                          9,146,528
                          
                          
                          
                          9,161,596Less:
      weighted average participating restricted shares
    outstanding
                          
                          
                          66,000
                          
                          
                          
                          88,359
                          
                          
                          
                          70,974
                          
                          
                          
                          95,547Weighted-average
      dilutive shares outstanding
                          
                          
                          9,087,769
                          
                          
                          
                          9,069,346
                          
                          
                          
                          9,075,554
                          
                          
                          
                          9,066,049Dilutive
      net income (loss) per share
                          
                          $
                          1.49
                          
                          
                          $
                          (.06
                          )
                          
                          $
                          1.63
                          
                          
                          $
                          (3.66
                          )Weighted-average
      shares of potentially dilutive instruments that are not included in the
      dilutive share calculation due to anti-dilutive effect:Compensation
      plan-related stock options
                          
                          
                          39,600
                          
                          
                          
                          37,600
                          
                          
                          
                          38,721
                          
                          
                          
                          70,468Common
      stock warrant
                          
                          
                          513,113
                          
                          
                          
                          513,113
                          
                          
                          
                          513,113
                          
                          
                          
                          405,980
  32
  FIRST M
& F CORPORATION
 
 Item
2 - Management’s Discussion and
Analysis of Financial Condition and Results of Operations
 
 The
following provides a narrative discussion and analysis of significant changes in
the Company’s results of operations and financial condition. This discussion
should be read in conjunction with the interim consolidated financial statements
and supplemental financial data presented elsewhere in this report.
 
 Forward
Looking Statements
 
 Certain
of the information included in this discussion contains forward looking
financial data and information that is based upon management’s belief as well as
certain assumptions made by, and information currently available to management.
Should the assumptions prove to be significantly different, actual results may
vary from those estimated, anticipated, projected or expected. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following:
 
 ·
              A
      significant weakening of the
economy.
 
 ·
              A
      collapse of real estate values or the values of other assets that may
      serve as collateral on customers’
borrowings.
 
 ·
              Adverse
      changes in interest rates that could destabilize the Company’s net
      interest margins.
 
 ·
              An
      unanticipated inflationary spike or deflationary
  decline.
 
 ·
              A
      market crash or a highly volatile
market.
 
 ·
              A
      loss of market liquidity for financial
products.
 
 ·
              Unfavorable
      judgments in ongoing litigation.
 
 ·
              Technological
      disruptions or breaches.
 
 ·
              Unanticipated
      catastrophic events or natural
disasters.
 
 ·
              Unforeseen
      new competition from outside the traditional financial services
      industry.
 
 ·
              Unanticipated
      changes in laws and regulations related to businesses that the Company is
      in or anticipates entering into or related to transactions that the
      Company engages in or anticipates engaging
in.
  33
  FIRST M
& F CORPORATION
 
 Financial
Summary
 
 Net
income for the third quarter of 2010 was $1.245 million, or $1.49 basic and
diluted earnings per share as compared to a net loss of $136 thousand, or $.06
basic and diluted loss per share for the same period in 2009 and net income of
$1.272 million or $.09 basic and diluted earnings per share for the second
quarter of 2010. Net income for the first nine months of 2010 was $3.370 million
or $1.63 basic and diluted earnings per share as compared to a net loss of
$32.488 million or $3.66 basic and diluted loss per share for the same period in
2009. Major factors contributing to the increase in year-over-year earnings were
(1) a decrease of $26.900 million in loan loss accruals as compared to 2009, (2)
a decrease of $21.134 million in noninterest expenses as compared to 2009 as a
result of a goodwill impairment charge of $15.800 million during the first
quarter of 2009 and additional intangible asset impairment charges of $1.248
million during the first quarter of 2009 and (3) a decrease of $1.749 million in
foreclosed property expenses.
 
 Earnings
per share for the three month and nine month periods in 2010 include the effect
of a $12.867 million gain on the swap of newly issued preferred stock with an
initial coupon of 2% issued in the TARP Community Development Capital Initiative
for outstanding preferred stock with an initial coupon of 5% issued in the TARP
Capital Purchase Program. The gain on the preferred stock transaction was
recorded directly in retained earnings.
 
 Highlights
for the first nine months of 2010 and 2009 are as follows:
 
 ·
              The
      Company received $30.000 million in February 2009 from the U. S. Treasury
      for preferred stock and a stock warrant as a participant in the U. S.
      Treasury’s TARP Capital Purchase
Program
 ·
              The
      Company’s bank subsidiary was certified as a Community Development
      Financial Institution in September 2010, allowing it access to capital
      under the TARP Community Development Capital
  Initiative
 ·
              In
      September 2010 the Company issued preferred stock with a 2% coupon
      pursuant to the Community Development Capital Initiative and exchanged it
      with the U. S. Treasury for its 5% coupon preferred stock originally
      issued pursuant to the Capital Purchase
Program
 ·
              Debit
      card revenues increased by 27.82% for the third quarter of 2010 from the
      third quarter of 2009
 ·
              The
      net interest margin increased to 3.60% in the third quarter of 2010 from
      3.40% in the second quarter of 2010 and 3.40% in the third quarter of
      2009
 ·
              Loans
      held for investment decreased by $11.327 million during the first nine
      months of 2010 and by $77.487 million during the first nine months of
      2009
 ·
              Nonaccrual
      loans were 3.53% of total loans at September 30, 2010 as compared to 4.17%
      at December 31, 2009 and 6.24% at September 30,
  2009
 ·
              Annualized
      net charge-offs were .19% for the third quarter of 2010 as compared to
      2.01% for the second quarter of 2010, 8.87% for the fourth quarter of 2009
      and 1.24% for the third quarter of
2009
 ·
              Closed
      a full-service branch in Memphis, Tennessee in February
    2010
 ·
              Closed
      a full-service branch in Germantown, Tennessee in February
      2010
 ·
              Closed
      a full-service branch in Birmingham, Alabama in February
    2010
 ·
              Closed
      a full-service branch in Collierville, Tennessee in February
      2009
  34




FIRST M
& F CORPORATION





The
following table shows the quarterly net loan, non-interest bearing deposit, and
interest bearing deposit changes for the last five quarters:





(Net change, in
thousands)





Non-Interest
                          
                          
                          InterestLoans
                          
                          
                          Bearing Deposits
                          
                          
                          Bearing Deposits3rd
      Qtr 2009
                          
                          
                          (8,633
                          )
                          
                          
                          15,835
                          
                          
                          
                          31,4344th
      Qtr 2009
                          
                          
                          (40,768
                          )
                          
                          
                          31,580
                          
                          
                          
                          (134
                          )1st
      Qtr 2010
                          
                          
                          (15,911
                          )
                          
                          
                          (10,896
                          )
                          
                          
                          (3,369
                          )2nd
      Qtr 2010
                          
                          
                          (4,314
                          )
                          
                          
                          10,142
                          
                          
                          
                          (40,329
                          )3rd
      Qtr 2010
                          
                          
                          8,898
                          
                          
                          
                          (7,269
                          )
                          
                          
                          (14,663
                          )





The
following table shows the quarterly net interest income, loan loss accruals,
non-interest income and non-interest expense amounts for the last five
quarters:





(Net amount, in
thousands)





Net Interest
                      
                      
                      Loan Loss
                      
                      
                      Non-Interest
                      
                      
                      Non-InterestIncome
                      
                      
                      Accruals
                      
                      
                      Income
                      
                      
                      Expense3rd
      Qtr 2009
                      
                      
                      12,298
                      
                      
                      
                      4,805
                      
                      
                      
                      5,381
                      
                      
                      
                      14,1404th
      Qtr 2009
                      
                      
                      12,187
                      
                      
                      
                      15,761
                      
                      
                      
                      4,425
                      
                      
                      
                      34,8761st
      Qtr 2010
                      
                      
                      11,241
                      
                      
                      
                      2,280
                      
                      
                      
                      5,603
                      
                      
                      
                      13,4092nd
      Qtr 2010
                      
                      
                      11,898
                      
                      
                      
                      2,380
                      
                      
                      
                      5,216
                      
                      
                      
                      13,3423rd
      Qtr 2010
                      
                      
                      12,294
                      
                      
                      
                      2,280
                      
                      
                      
                      4,746
                      
                      
                      
                      13,111





The
following table shows the components of pre-tax basic earnings (loss) per share
for the last five quarters:





3rd Qtr
                      2010
                    
                    
                    2nd Qtr
                      2010
                    
                    
                    1st Qtr
                      2010
                    
                    
                    4th Qtr
                      2009
                    
                    
                    3rd Qtr
                      2009Net
      interest income
                    
                    $
                    1.35
                    
                    
                    $
                    1.31
                    
                    
                    $
                    1.24
                    
                    
                    $
                    1.34
                    
                    
                    $
                    1.36Loan
      loss expense
                    
                    
                    .25
                    
                    
                    
                    .26
                    
                    
                    
                    .25
                    
                    
                    
                    1.74
                    
                    
                    
                    .53Noninterest
      income
                    
                    
                    .52
                    
                    
                    
                    .57
                    
                    
                    
                    .62
                    
                    
                    
                    .49
                    
                    
                    
                    .59Noninterest
      expense
                    
                    
                    1.44
                    
                    
                    
                    1.47
                    
                    
                    
                    1.48
                    
                    
                    
                    1.99
                    
                    
                    
                    1.56Net
      income (loss) before taxes
                    
                    $
                    .18
                    
                    
                    $
                    .15
                    
                    
                    $
                    .13
                    
                    
                    $
                    (1.90
                    )
                    
                    $
                    (.14
                    )


35





FIRST M
& F CORPORATION





The
following table shows performance ratios for the last five
quarters:





3rd Qtr 2010
                
                
                2nd Qtr 2010
                
                
                1st Qtr 2010
                
                
                4th Qtr 2009
                
                
                3rdQtr 2009Net
      interest margin
                
                
                3.60
                %
                
                
                3.40
                %
                
                
                3.16
                %
                
                
                3.28
                %
                
                
                3.40
                %Efficiency
      ratio
                
                
                75.75
                
                
                
                76.69
                
                
                
                78.16
                
                
                
                106.73
                
                
                
                78.34Return
      on assets
                
                
                .32
                
                
                
                .32
                
                
                
                .21
                
                
                
                (6.46
                )
                
                
                (.03
                )Return
      on  total equity
                
                
                4.55
                
                
                
                4.84
                
                
                
                3.28
                
                
                
                (81.32
                )
                
                
                (.40
                )Return
      on common equity
                
                
                4.02
                
                
                
                4.37
                
                
                
                2.20
                
                
                
                (105.37
                )
                
                
                (2.13
                )Noninterest
      income to avg. assets
                
                
                1.21
                
                
                
                1.31
                
                
                
                1.39
                
                
                
                1.05
                
                
                
                1.30Noninterest
      income to revenues (1)
                
                
                27.42
                
                
                
                29.98
                
                
                
                32.66
                
                
                
                26.09
                
                
                
                29.81Noninterest
      expense to avg assets
                
                
                3.35
                
                
                
                3.35
                
                
                
                3.32
                
                
                
                8.25
                
                
                
                3.41Salaries
      and benefits to total noninterest expense
                
                
                52.27
                
                
                
                51.67
                
                
                
                50.89
                
                
                
                19.35
                
                
                
                50.25Contribution
      margin (2)
                
                
                60.41
                
                
                
                60.37
                
                
                
                60.22
                
                
                
                60.22
                
                
                
                60.64Nonaccrual
      loans to loans
                
                
                3.53
                
                
                
                3.41
                
                
                
                4.01
                
                
                
                4.17
                
                
                
                6.2490
      day past due loans to loans
                
                
                .08
                
                
                
                .13
                
                
                
                .20
                
                
                
                .23
                
                
                
                .57Annualized
      net charge offs as a percent of average loans
                
                
                .19
                
                
                
                2.01
                
                
                
                1.99
                
                
                
                8.87
                
                
                
                1.24


(1)
            Revenues
      equal tax-equivalent net interest income before loan loss expense, plus
      noninterest income.


(2)
            Contribution
      margin equals revenues minus salaries and benefits, divided by
      revenues.





The
following table shows revenue related performance statistics for the last five
quarters:





(Dollars in thousands)
                
                3rd Qtr 2010
                
                
                2nd Qtr 2010
                
                
                1st Qtr 2010
                
                
                4th Qtr 2009
                
                
                3rd Qtr 2009Mortgage
      originations
                
                $
                19,630
                
                
                $
                19,788
                
                
                $
                17,847
                
                
                $
                17,925
                
                
                $
                23,386Trust
      revenues
                
                
                47
                
                
                
                55
                
                
                
                59
                
                
                
                47
                
                
                
                52Retail
      investment revenues
                
                
                92
                
                
                
                89
                
                
                
                62
                
                
                
                70
                
                
                
                68Revenues
      per FTE employee
                
                
                35
                
                
                
                35
                
                
                
                34
                
                
                
                34
                
                
                
                34Agency
      commissions per agency FTE employee (1)
                
                
                29
                
                
                
                24
                
                
                
                24
                
                
                
                21
                
                
                
                28


(1)
Agency commissions are property, casualty, life and health commissions produced
by the insurance agency personnel.





The
following table shows additional statistics for the Company at the end of the
last five quarters:





3rd Qtr 2010
                
                
                2nd Qtr 2010
                
                
                1st Qtr 2010
                
                
                4th Qtr 2009
                
                
                3rd Qtr 2009Full-time
      equivalent employees
                
                
                497
                
                
                
                498
                
                
                
                499
                
                
                
                512
                
                
                
                523Number
      of noninterest-bearing deposit accounts
                
                
                33,040
                
                
                
                33,085
                
                
                
                33,209
                
                
                
                33,289
                
                
                
                33,811


36





FIRST M
& F CORPORATION





Net
Interest Income





Net
interest income before loan loss expenses for the first nine months of 2010 was
$35.433 million as compared to $35.407 million for the first nine months of
2009. For the first nine months of 2010 compared to 2009: earning asset yields
decreased by 34 basis points, liability costs decreased by 49 basis points, the
net interest spread increased by 14 basis points and the net interest margin
increased by 8 basis points.





Net
interest income before loan loss expenses for the third quarter of 2010 was
$12.294 million as compared to $12.298 million for the third quarter of 2009 and
$11.898 million for the second quarter of 2010. For the third quarter of 2010
compared to the same quarter of 2009: earning asset yields decreased by 26 basis
points, liability costs decreased by 50 basis points, the net interest spread
increased by 24 basis points and the net interest margin increased by 20 basis
points. For the third quarter of 2010 compared to the second quarter of 2010:
earning asset yields increased by 3 basis points, liability costs decreased by
19 basis points, the net interest spread increased by 22 basis points and the
net interest margin increased by 20 basis points.





Balance
sheet dynamics affecting the comparative net interest margins for the first nine
months of 2010 compared to 2009 include (1) a decrease of 7.52% in average loans
held for investment, (2) a decrease in average loans as a percentage of earning
assets from 76.43% in the first nine months of 2009 to 72.99% in the first nine
months of 2010, (3) an increase in average interest-bearing deposits of 1.30%,
(4) a decrease in average other borrowings of 34.29% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.34%
in 2009 to 13.80% in 2010.





Balance
sheet dynamics affecting the comparative net interest margins for the third
quarter of 2010 compared to 2009 include (1) a decrease of 4.90% in average
loans held for investment, (2) an increase in average loans as a percentage of
earning assets from 74.42% in the second quarter of 2009 to 75.58% in the second
quarter of 2010, (3) a decrease in average interest-bearing deposits of 1.64%,
(4) a decrease in average other borrowings of 48.71% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.59%
in 2009 to 14.50% in 2010.





Balance
sheet dynamics affecting the comparative net interest margins for the third
quarter of 2010 compared to the second quarter of 2010 include (1) an increase
of .78% in average loans held for investment, (2) an increase in average loans
as a percentage of earning assets from 72.19% in the second quarter of 2010 to
75.58% in the third quarter of 2010, (3) a decrease in average interest-bearing
deposits of 2.95%, (4) a decrease in average other borrowings of 23.73% and (5)
an increase in average noninterest-bearing deposits as a percentage of total
assets from 13.91% in the second quarter of 2010 to 14.50% in the third quarter
of 2010.





Yield and
cost dynamics affecting the comparative net interest margins for the first nine
months of 2010 compared to 2009 include (1) an increase of 2 basis points in
yields on loans held for investment and for sale, (2) a decrease of 109 basis
points in investment and short-term funds yields, (3) a decrease of 45 basis
points in costs of deposits and (4) an increase of 6 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the third
quarter of 2010 compared to 2009 include (1) a decrease of 17 basis points in
yields on loans held for investment and for sale, (2) a decrease of 62 basis
points in investment and short-term funds yields, (3) a decrease of 43 basis
points in costs of deposits and (4) an increase of 5 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the third
quarter of 2010 compared to the second quarter of 2010 include (1) a decrease of
16 basis points in yields on loans held for investment and for sale, (2) an
increase of 21 basis points in investment and short-term funds yields, (3) a
decrease of 15 basis points in costs of deposits and (4) a decrease of 24 basis
points in costs of borrowings.


37





FIRST M
& F CORPORATION





Net
interest income was flat compared to the third quarter of 2009, with the net
interest margin increasing to 3.60% on a tax equivalent basis in the third
quarter of 2010 as compared to 3.40% in the third quarter of 2009. The
significant contributors to the increase in net interest margin year over year
was the improvement in spreads, primarily due to lower cost of funds followed by
a trend downward in new nonaccrual loans. The net interest margin for the second
quarter of 2010 was 3.40% as compared to 3.16% for the first quarter of 2010 and
3.28% for the fourth quarter of 2009.  Loan yields fell to 5.90% in
the third quarter of 2010 from 6.07% in the third quarter of 2009. Loan yields
decreased from the second quarter of 2010 to the third quarter as well as the
Company strove to increase loan volumes in the face of tepid demand. Average
loans were $1.052 billion for the third quarter of 2010 as compared to $1.045
billion for the second quarter of 2010 and $1.107 billion during the third
quarter of 2009. Loans increased by $8.9 million in the third quarter of 2010
and fell by $4.3 million in the second quarter.





Deposit
costs decreased in the third quarter of 2010 from the second quarter of 2010 and
from the third quarter of 2009, in response to the continuing low rate
environment.  Deposit costs were 1.60% in the third quarter of 2010 as
compared to 2.03% in the third quarter of 2009. Deposits fell by $21.9 million
during the third quarter of 2010 consistent with historic summertime runoff and
have fallen $34.9 million since the third quarter of 2009. Management plans to
continue to focus on core deposit growth for 2010 to encourage
relationship-driven deposits as a stable source of funding.





Management
expects the net interest margin to improve slightly as the Company (1) continues
to reprice and renew maturing certificates of deposit in the lower rate
environment, (2) invests excess liquidity now earning Fed funds rates into
higher yielding securities, (3) converts nonperforming assets, primarily other
real estate, into liquid funds and (4) slows the pace of new nonaccrual loans
while working out the current nonaccrual loan portfolio.


38





FIRST M
& F CORPORATION





The
following table shows the components of the net interest margin for the second
and third quarters of 2010 and 2009:




Yields/Costs
                                                                                  
                                                                                  
                                                                                  Yields/Costs3rd Quarter, 2010
                                                                                  
                                                                                  
                                                                                  2nd Quarter, 2010
                                                                                  
                                                                                  
                                                                                  3rd Quarter, 2009
                                                                                  
                                                                                  
                                                                                  2nd Quarter, 2009Interest
      bearing bank balances
                                                                                  
                                                                                  
                                                                                  0.31
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.24
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.11
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.06
                                                                                  %Federal
      funds sold
                                                                                  
                                                                                  
                                                                                  0.24
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.24
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.22
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.23Taxable
      investments
                                                                                  
                                                                                  
                                                                                  3.14
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.34
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.82
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.00Tax-exempt
      investments
                                                                                  
                                                                                  
                                                                                  5.95
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.01
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.97
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.01Loans
      held for sale
                                                                                  
                                                                                  
                                                                                  3.43
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.90
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.13
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.13Loans
      held for investment
                                                                                  
                                                                                  
                                                                                  5.91
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.08
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.08
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.72Earning
      asset yield
                                                                                  
                                                                                  
                                                                                  5.19
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.16
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.45
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.30Interest
      checking
                                                                                  
                                                                                  
                                                                                  1.04
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.06
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.17
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.42Money
      market deposits
                                                                                  
                                                                                  
                                                                                  1.11
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.13
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.18
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.33Savings
                                                                                  
                                                                                  
                                                                                  1.27
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.28
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.41
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.51Certificates
      of deposit
                                                                                  
                                                                                  
                                                                                  2.15
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.40
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.80
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.99Short-term
      borrowings
                                                                                  
                                                                                  
                                                                                  0.33
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.57
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.82
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.08Other
      borrowings
                                                                                  
                                                                                  
                                                                                  5.01
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.82
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.41
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.51Cost
      of interest-bearing liabilities
                                                                                  
                                                                                  
                                                                                  1.82
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.01
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.32
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.46Net
      interest spread
                                                                                  
                                                                                  
                                                                                  3.37
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.15
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.13
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.84Effect
      of non-interest bearing deposits
                                                                                  
                                                                                  
                                                                                  .29
                                                                                  
                                                                                  
                                                                                  
                                                                                  .30
                                                                                  
                                                                                  
                                                                                  
                                                                                  .30
                                                                                  
                                                                                  
                                                                                  
                                                                                  .31Effect
      of leverage
                                                                                  
                                                                                  
                                                                                  (.06
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (.05
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (.03
                                                                                  )
                                                                                  
                                                                                  
                                                                                  .01Net
      interest margin, tax-equivalent
                                                                                  
                                                                                  
                                                                                  3.60
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.40
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.40
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.16Less:
      Tax equivalent adjustments:Investments
                                                                                  
                                                                                  
                                                                                  .06
                                                                                  
                                                                                  
                                                                                  
                                                                                  .06
                                                                                  
                                                                                  
                                                                                  
                                                                                  .08
                                                                                  
                                                                                  
                                                                                  
                                                                                  .09Loans
                                                                                  
                                                                                  
                                                                                  .02
                                                                                  
                                                                                  
                                                                                  
                                                                                  .02
                                                                                  
                                                                                  
                                                                                  
                                                                                  .02
                                                                                  
                                                                                  
                                                                                  
                                                                                  .01Reported
      book net interest margin
                                                                                  
                                                                                  
                                                                                  3.52
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.32
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.30
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.06
                                                                                  %The
      following table shows the components of the net interest margin for the
      first nine months of 2010 and 2009:Yields/CostsSeptember 2010
                                                                                  
                                                                                  
                                                                                  September 2009Interest
      bearing bank balances
                                                                                  
                                                                                  
                                                                                  0.24
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.12
                                                                                  %Federal
      funds sold
                                                                                  
                                                                                  
                                                                                  0.23
                                                                                  
                                                                                  
                                                                                  
                                                                                  0.23Taxable
      investments
                                                                                  
                                                                                  
                                                                                  3.33
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.18Tax-exempt
      investments
                                                                                  
                                                                                  
                                                                                  5.98
                                                                                  
                                                                                  
                                                                                  
                                                                                  6.02Loans
      held for sale
                                                                                  
                                                                                  
                                                                                  2.95
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.31Loans
      held for investment
                                                                                  
                                                                                  
                                                                                  5.97
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.94Earning
      asset yield
                                                                                  
                                                                                  
                                                                                  5.12
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.46Interest
      checking
                                                                                  
                                                                                  
                                                                                  1.06
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.32Money
      market deposits
                                                                                  
                                                                                  
                                                                                  1.11
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.41Savings
                                                                                  
                                                                                  
                                                                                  1.29
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.52Certificates
      of deposit
                                                                                  
                                                                                  
                                                                                  2.35
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.94Short-term
      borrowings
                                                                                  
                                                                                  
                                                                                  0.46
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.05Other
      borrowings
                                                                                  
                                                                                  
                                                                                  4.86
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.51Cost
      of interest-bearing liabilities
                                                                                  
                                                                                  
                                                                                  1.98
                                                                                  
                                                                                  
                                                                                  
                                                                                  2.46Net
      interest spread
                                                                                  
                                                                                  
                                                                                  3.14
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.00Effect
      of non-interest bearing deposits
                                                                                  
                                                                                  
                                                                                  .29
                                                                                  
                                                                                  
                                                                                  
                                                                                  .31Effect
      of leverage
                                                                                  
                                                                                  
                                                                                  (.05
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (.01
                                                                                  )Net
      interest margin, tax-equivalent
                                                                                  
                                                                                  
                                                                                  3.38
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.30Less:
      Tax equivalent adjustments:Investments
                                                                                  
                                                                                  
                                                                                  .07
                                                                                  
                                                                                  
                                                                                  
                                                                                  .09Loans
                                                                                  
                                                                                  
                                                                                  .01
                                                                                  
                                                                                  
                                                                                  
                                                                                  .01Reported
      book net interest margin
                                                                                  
                                                                                  
                                                                                  3.30
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.20
                                                                                  %


39





FIRST M
& F CORPORATION





The
following table shows average balance sheets for the second and third quarters
of 2010 and 2009:




(Dollars in thousands)3rd Quarter, 2010
                                                                                              
                                                                                              
                                                                                              2nd Quarter, 2010
                                                                                              
                                                                                              
                                                                                              3rd Quarter, 2009
                                                                                              
                                                                                              
                                                                                              2nd Quarter, 2009Interest
      bearing bank balances
                                                                                              
                                                                                              $
                                                                                              29,023
                                                                                              
                                                                                              
                                                                                              $
                                                                                              68,553
                                                                                              
                                                                                              
                                                                                              $
                                                                                              14,850
                                                                                              
                                                                                              
                                                                                              $
                                                                                              9,339Federal
      funds sold
                                                                                              
                                                                                              
                                                                                              28,522
                                                                                              
                                                                                              
                                                                                              
                                                                                              39,548
                                                                                              
                                                                                              
                                                                                              
                                                                                              41,032
                                                                                              
                                                                                              
                                                                                              
                                                                                              23,959Taxable
      investments
                                                                                              
                                                                                              
                                                                                              235,439
                                                                                              
                                                                                              
                                                                                              
                                                                                              243,858
                                                                                              
                                                                                              
                                                                                              
                                                                                              260,003
                                                                                              
                                                                                              
                                                                                              
                                                                                              250,023Tax-exempt
      investments
                                                                                              
                                                                                              
                                                                                              39,743
                                                                                              
                                                                                              
                                                                                              
                                                                                              41,696
                                                                                              
                                                                                              
                                                                                              
                                                                                              54,940
                                                                                              
                                                                                              
                                                                                              
                                                                                              57,091Loans
      held for sale
                                                                                              
                                                                                              
                                                                                              5,320
                                                                                              
                                                                                              
                                                                                              
                                                                                              6,363
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,235
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,036Loans
      held for investment
                                                                                              
                                                                                              
                                                                                              1,046,242
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,038,148
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,100,109
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,131,370Earning
      assets
                                                                                              
                                                                                              
                                                                                              1,384,289
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,438,166
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,478,169
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,478,818Other
      assets
                                                                                              
                                                                                              
                                                                                              169,126
                                                                                              
                                                                                              
                                                                                              
                                                                                              160,119
                                                                                              
                                                                                              
                                                                                              
                                                                                              168,541
                                                                                              
                                                                                              
                                                                                              
                                                                                              132,695Total
      assets
                                                                                              
                                                                                              $
                                                                                              1,553,415
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,598,285
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,646,710
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,611,513Interest
      checking
                                                                                              
                                                                                              $
                                                                                              312,167
                                                                                              
                                                                                              
                                                                                              $
                                                                                              322,791
                                                                                              
                                                                                              
                                                                                              $
                                                                                              280,104
                                                                                              
                                                                                              
                                                                                              $
                                                                                              280,952Money
      market deposits
                                                                                              
                                                                                              
                                                                                              149,972
                                                                                              
                                                                                              
                                                                                              
                                                                                              143,445
                                                                                              
                                                                                              
                                                                                              
                                                                                              155,665
                                                                                              
                                                                                              
                                                                                              
                                                                                              172,014Savings
      deposits
                                                                                              
                                                                                              
                                                                                              115,332
                                                                                              
                                                                                              
                                                                                              
                                                                                              113,983
                                                                                              
                                                                                              
                                                                                              
                                                                                              112,684
                                                                                              
                                                                                              
                                                                                              
                                                                                              113,799Certificates
      of deposit
                                                                                              
                                                                                              
                                                                                              528,929
                                                                                              
                                                                                              
                                                                                              
                                                                                              559,825
                                                                                              
                                                                                              
                                                                                              
                                                                                              576,388
                                                                                              
                                                                                              
                                                                                              
                                                                                              552,134Short-term
      borrowings
                                                                                              
                                                                                              
                                                                                              17,583
                                                                                              
                                                                                              
                                                                                              
                                                                                              10,728
                                                                                              
                                                                                              
                                                                                              
                                                                                              12,556
                                                                                              
                                                                                              
                                                                                              
                                                                                              9,013Other
      borrowings
                                                                                              
                                                                                              
                                                                                              84,991
                                                                                              
                                                                                              
                                                                                              
                                                                                              111,440
                                                                                              
                                                                                              
                                                                                              
                                                                                              165,722
                                                                                              
                                                                                              
                                                                                              
                                                                                              157,054Interest-bearing
      liabilities
                                                                                              
                                                                                              
                                                                                              1,208,974
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,262,212
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,303,119
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,284,966Noninterest-bearing
      deposits
                                                                                              
                                                                                              
                                                                                              225,223
                                                                                              
                                                                                              
                                                                                              
                                                                                              222,318
                                                                                              
                                                                                              
                                                                                              
                                                                                              190,917
                                                                                              
                                                                                              
                                                                                              
                                                                                              184,716Other
      liabilities
                                                                                              
                                                                                              
                                                                                              10,683
                                                                                              
                                                                                              
                                                                                              
                                                                                              8,374
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,309
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,711Stockholders’
      equity
                                                                                              
                                                                                              
                                                                                              108,535
                                                                                              
                                                                                              
                                                                                              
                                                                                              105,381
                                                                                              
                                                                                              
                                                                                              
                                                                                              135,365
                                                                                              
                                                                                              
                                                                                              
                                                                                              138,120Liabilities
      and stockholders’ equity
                                                                                              
                                                                                              $
                                                                                              1,553,415
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,598,285
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,646,710
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,611,513Loans
      to earning assets
                                                                                              
                                                                                              
                                                                                              75.58
                                                                                              %
                                                                                              
                                                                                              
                                                                                              72.19
                                                                                              %
                                                                                              
                                                                                              
                                                                                              74.42
                                                                                              %
                                                                                              
                                                                                              
                                                                                              76.51
                                                                                              %Loans
      to assets
                                                                                              
                                                                                              
                                                                                              67.35
                                                                                              %
                                                                                              
                                                                                              
                                                                                              64.95
                                                                                              %
                                                                                              
                                                                                              
                                                                                              66.81
                                                                                              %
                                                                                              
                                                                                              
                                                                                              70.80
                                                                                              %Earning
      assets to assets
                                                                                              
                                                                                              
                                                                                              89.11
                                                                                              %
                                                                                              
                                                                                              
                                                                                              89.98
                                                                                              %
                                                                                              
                                                                                              
                                                                                              89.76
                                                                                              %
                                                                                              
                                                                                              
                                                                                              91.77
                                                                                              %Noninterest-bearing
      deposits to assets
                                                                                              
                                                                                              
                                                                                              14.50
                                                                                              %
                                                                                              
                                                                                              
                                                                                              13.91
                                                                                              %
                                                                                              
                                                                                              
                                                                                              11.59
                                                                                              %
                                                                                              
                                                                                              
                                                                                              11.46
                                                                                              %Equity
      to assets
                                                                                              
                                                                                              
                                                                                              6.99
                                                                                              %
                                                                                              
                                                                                              
                                                                                              6.59
                                                                                              %
                                                                                              
                                                                                              
                                                                                              8.22
                                                                                              %
                                                                                              
                                                                                              
                                                                                              8.57
                                                                                              %The
      following table shows average balance sheets for the first nine months of
      2010 and 2009:(Dollars in thousands)September 2010
                                                                                              
                                                                                              
                                                                                              September 2009Interest
      bearing bank balances
                                                                                              
                                                                                              $
                                                                                              59,409
                                                                                              
                                                                                              
                                                                                              $
                                                                                              13,457Federal
      funds sold
                                                                                              
                                                                                              
                                                                                              39,228
                                                                                              
                                                                                              
                                                                                              
                                                                                              36,589Taxable
      investments
                                                                                              
                                                                                              
                                                                                              238,443
                                                                                              
                                                                                              
                                                                                              
                                                                                              233,965Tax-exempt
      investments
                                                                                              
                                                                                              
                                                                                              42,635
                                                                                              
                                                                                              
                                                                                              
                                                                                              57,284Loans
      held for sale
                                                                                              
                                                                                              
                                                                                              7,707
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,746Loans
      held for investment
                                                                                              
                                                                                              
                                                                                              1,046,819
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,131,950Earning
      assets
                                                                                              
                                                                                              
                                                                                              1,434,241
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,480,991Other
      assets
                                                                                              
                                                                                              
                                                                                              162,266
                                                                                              
                                                                                              
                                                                                              
                                                                                              153,606Total
      assets
                                                                                              
                                                                                              $
                                                                                              1,596,507
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,634,597Interest
      checking
                                                                                              
                                                                                              $
                                                                                              321,618
                                                                                              
                                                                                              
                                                                                              $
                                                                                              274,984Money
      market deposits
                                                                                              
                                                                                              
                                                                                              146,859
                                                                                              
                                                                                              
                                                                                              
                                                                                              166,746Savings
      deposits
                                                                                              
                                                                                              
                                                                                              113,870
                                                                                              
                                                                                              
                                                                                              
                                                                                              113,706Certificates
      of deposit
                                                                                              
                                                                                              
                                                                                              555,037
                                                                                              
                                                                                              
                                                                                              
                                                                                              567,377Short-term
      borrowings
                                                                                              
                                                                                              
                                                                                              14,029
                                                                                              
                                                                                              
                                                                                              
                                                                                              10,587Other
      borrowings
                                                                                              
                                                                                              
                                                                                              109,245
                                                                                              
                                                                                              
                                                                                              
                                                                                              166,264Interest-bearing
      liabilities
                                                                                              
                                                                                              
                                                                                              1,260,658
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,299,664Noninterest-bearing
      deposits
                                                                                              
                                                                                              
                                                                                              220,272
                                                                                              
                                                                                              
                                                                                              
                                                                                              185,319Other
      liabilities
                                                                                              
                                                                                              
                                                                                              9,066
                                                                                              
                                                                                              
                                                                                              
                                                                                              8,464Stockholders’
      equity
                                                                                              
                                                                                              
                                                                                              106,511
                                                                                              
                                                                                              
                                                                                              
                                                                                              141,150Liabilities
      and stockholders’ equity
                                                                                              
                                                                                              $
                                                                                              1,596,507
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,634,597Loans
      to earning assets
                                                                                              
                                                                                              
                                                                                              72.99
                                                                                              %
                                                                                              
                                                                                              
                                                                                              76.43
                                                                                              %Loans
      to assets
                                                                                              
                                                                                              
                                                                                              65.57
                                                                                              %
                                                                                              
                                                                                              
                                                                                              69.25
                                                                                              %Earning
      assets to assets
                                                                                              
                                                                                              
                                                                                              89.84
                                                                                              %
                                                                                              
                                                                                              
                                                                                              90.60
                                                                                              %Noninterest-bearing
      deposits to assets
                                                                                              
                                                                                              
                                                                                              13.80
                                                                                              %
                                                                                              
                                                                                              
                                                                                              11.34
                                                                                              %Equity
      to assets
                                                                                              
                                                                                              
                                                                                              6.67
                                                                                              %
                                                                                              
                                                                                              
                                                                                              8.64
                                                                                              %


40





FIRST M
& F CORPORATION





Provision
for Loan Losses





The
accrual for the provision for loan losses for the first nine months of 2010 was
$6.940 million as compared to $33.840 million for the first nine months of 2009.
Net charge offs were $10.877 million for the first nine months of 2010 as
compared to $26.063 million for the first nine months of 2009.





The
accrual for the provision for loan losses for the third quarter of 2010 was
$2.280 million as compared to $4.805 million for the third quarter of 2009. Net
charge-offs were $504 thousand for the third quarter of 2010 as compared to
$3.433 million for the third quarter of 2009. The allowance for loan losses as a
percentage of loans was 1.92% at September 30, 2010, 2.27% at December 31, 2009,
and 2.97% at September 30, 2009.





During
the course of 2008 and 2009 the loan loss provision became more influenced by
the effect of deteriorating real estate values on loans that are individually
reviewed for impairment. The Credit Risk Management section of this discussion
provides further details on the allowance provisioning process.





Non
Interest Income





Noninterest
income, excluding securities transactions, for the first nine months of 2010 was
$14.252 million as compared to $15.515 million for the same period in 2009. For
the first nine months of 2010 as compared to 2009: (1) deposit revenues
decreased by $463 thousand, (2) mortgage banking revenues decreased by $286
thousand and (3) agency commissions decreased by $80 thousand.





Noninterest
income, excluding securities transactions, for the third quarter of 2010 was
$4.779 million as compared to $5.177 million for the same period in 2009 and
$4.672 million in the second quarter of 2010. For the third quarter of 2010 as
compared to the third quarter of 2009: (1) deposit revenues decreased by $175
thousand, (2) mortgage banking revenues decreased by $138 thousand and (3)
agency commissions increased by $15 thousand. For the third quarter of 2010 as
compared to the second quarter of 2010: (1) deposit revenues increased by $63
thousand, (2) mortgage banking revenues decreased by $139 thousand and (3)
agency commissions increased by $177 thousand.





The third
quarter of 2010 showed a decrease of 6.24% from the third quarter of 2009 and a
2.46% increase from the second quarter of 2010 in deposit revenues. Overdraft
fee revenues, which comprise approximately 61% of deposit revenues, decreased by
15.97% from the third quarter of 2009 to the third quarter of 2010 and increased
by 3.14% from the second quarter of 2010 to the third quarter of 2010. The
decline in the third quarter of 2010 from the third quarter of 2009 was due to
decreased item volumes. The increase in the third quarter of 2010 from the
second quarter of 2010 was due to increased item volumes. Overdraft fees are per
item charges applied to each check paid on an overdrawn account or returned. The
per item fee is determined by the Company’s pricing committee and is based
primarily on the competitive market prices as well as on costs associated with
processing the items. The majority of the volumes of overdraft items processed
come from customers in the Company’s overdraft protection program which grants
overdraft limits to customers, generally allows account activity up to the
overdraft limit balance, and requires that accounts have positive balances at
some point within a thirty day period. Overdrafts are considered loans for
accounting purposes and therefore are subject to the Company’s loan accounting
policies concerning the charging off of accounts to the allowance for loan
losses. Interest charged on overdrawn balances, based on the Federal discount
rate, is recorded as interest on loans. The overdraft protection program is
designed to help customers with their cash flow needs and is not extended to
individuals who are poor credit risks. Debit card revenues increased by 27.82%
from the third quarter of 2009 to the third quarter of 2010 and increased by
1.70% from the second quarter of 2010 to the third quarter of
2010.


41





FIRST M
& F CORPORATION





Management
expects overdraft fee revenues to continue to be a significant component of
deposit revenues and expects to see debit card revenues and transaction activity
continue to grow through the remainder of 2010. The Federal Reserve has issued a
regulatory change, effective July 1, 2010, prohibiting banks from charging fees
for paying overdrafts on automated teller machine and one-time debit card
transactions unless the customer consents, or opts in, to the overdraft service
for those types of transactions. Management estimates that, without mitigating
efforts, overdraft fee revenues could decline by as much as 10% on an annual
basis. However, management plans to implement customer education and other
mitigating programs that could limit the decline in revenues to approximately 2%
on an annual basis. The recently enacted Dodd-Frank Act includes measures that
would allow the Federal Reserve to define limits for interchange fees that may
be charged on debit cards. Management expects that this legislation could
significantly reduce debit card revenues in the future, but has not made a
determination of its financial impact. The following table shows the components
of deposit account income:





Three Months Ended
                
                
                Nine Months Ended(Dollars in thousands)
                
                September 30
                
                
                September 302010
                
                
                2009
                
                
                2010
                
                
                2009Service
      charge revenues
                
                $
                322
                
                
                $
                252
                
                
                $
                964
                
                
                $
                815Debit/ATM
      card revenues
                
                
                701
                
                
                
                641
                
                
                
                2,026
                
                
                
                2,039Overdraft
      fee revenues
                
                
                1,606
                
                
                
                1,911
                
                
                
                4,685
                
                
                
                5,284Service
      charges on deposit accounts
                
                $
                2,629
                
                
                $
                2,804
                
                
                $
                7,675
                
                
                $
                8,138





Mortgage
banking income decreased by 29.49% from the third quarter of 2009 to the third
quarter of 2010 and decreased by 29.64% from the second quarter of 2010 to the
third quarter of 2010. Mortgage originations decreased by 16.06% from the third
quarter of 2009 to the third quarter of 2010 and decreased by .80% from the
second quarter of 2010 to the third quarter of 2010. For 2009 mortgage rates hit
their peak in June at 5.59%. Rates continued to slowly decrease, hitting their
low point of 4.71% in December. Mortgage rates fell steadily in 2010 from a high
of 5.21% in April to a low of 4.32% in September. The first quarter of 2010
showed a loss of momentum in refinancing that had driven much of the 2009
performance. This trend continued into the second quarter. However, new loan
origination activity picked up during the second quarter of 2010 as rates fell
from 4.99% at the end of March to 4.69% at the end of June. The steady decline
in rates during the third quarter of 2010 resulted in the largest quarter of
refinancing for the year. During the first nine months of 2010 approximately
53.68% of originations were for refinancing purposes while for the calendar year
2009 approximately 69.27% of originations were for refinancing purposes. The
Federal Reserve ended its program of purchasing mortgage-backed securities as of
March 31, 2010. This policy move, coupled with a weak economy and the ending of
the first-time home buyer tax credit could keep mortgage origination volume down
for the foreseeable future.





Agency
commission income increased by 1.37% from the third quarter of 2009 to the third
quarter of 2010 and increased by 18.93% from the second quarter of 2010 to the
third quarter of 2010. For the third quarter of 2010 as compared to the third
quarter of 2009, property, casualty, health and life commissions increased by
4.13%. Insurance commission revenues are expected to be influenced by economic
activity, as consumers and businesses alike are reducing spending.





The
Company sold $9.902 million of U.S. government-sponsored enterprise securities
and $9.065 million of mortgage-backed securities for gains of approximately $672
thousand during the second quarter of 2010. The Company sold $19.942 million of
mortgage-backed securities and $5.387 million of municipal bonds for gains of
approximately $1.090 million during the first quarter of 2010. There were no
sales of securities during the third quarter of 2010. The proceeds from the sale
of the mortgage-backed securities, coupled with payments received from
mortgage-backed securities, were redeployed back into the mortgage-backed
portfolio. The proceeds from sales and maturities of municipal bonds and calls
of U.S. government sponsored enterprise bonds were reinvested into securities of
U.S. government sponsored enterprises, most of which had three to five year
maturities.


42





FIRST M
& F CORPORATION





The
Company owns certain beneficial interests in collateralized debt obligations
that own bank trust preferred securities. These beneficial interests are tested
for impairment on a quarterly basis. Two of the beneficial interests, Trapeza I
and MM Community Funding IX failed impairment tests at March 31, 2010. Three of
the beneficial interests, Trapeza II, Tpref Funding II and MM Community Funding
IX failed impairment tests at June 30, 2010. The Trapeza II and MM Community
Funding IX beneficial interests failed impairment tests at September 30, 2010.
The Trapeza I beneficial interest previously failed an impairment test at June
30, 2009 while the Trapeza II, Tpref Funding II and  MM Community
Funding IX beneficial interests failed impairment tests at December 31, 2009 due
primarily to collateral defaults and the subordinate position of the interests
as compared to other senior securities in the CDOs. Management determined that
the credit-related portion of the first quarter 2010 impairments was $202
thousand, the credit-related portion of the second quarter 2010 impairments was
$164 thousand and the credit-related portion of the third quarter 2010
impairments was $37 thousand.





The
following table summarizes certain financial information about the trust
preferred security-backed CDOs at the balance sheet date.





As of September 30, 2010(Dollars in thousands)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Deferrals andMoody’s
                    
                    Number of
                    
                    
                    Defaults asBook
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    Credit
                    
                    Banks in
                    
                    
                    a Percent
                    
                    
                    ExcessName of Issuer
                    
                    Class
                    
                    Value
                    
                    
                    Value
                    
                    
                    Loss
                    
                    Rating
                    
                    Issuance
                    
                    
                    of Collateral
                    
                    
                    SubordinationTrapeza
      I 2002-1A
                    
                    C1
                    
                    $
                    474
                    
                    
                    $
                    83
                    
                    
                    $
                    391
                    
                    C
                    
                    
                    25
                    
                    
                    
                    43.09
                    %
                    
                    
                    0.00
                    %Trapeza
      II 2003-2A
                    
                    C1
                    
                    
                    988
                    
                    
                    
                    195
                    
                    
                    
                    793
                    
                    Ca
                    
                    
                    37
                    
                    
                    
                    37.04
                    
                    
                    
                    0.00Tpref
      Funding II
                    
                    B
                    
                    
                    838
                    
                    
                    
                    208
                    
                    
                    
                    630
                    
                    Caa3
                    
                    
                    34
                    
                    
                    
                    34.47
                    
                    
                    
                    0.00Trapeza
      V 2003-5A
                    
                    C1
                    
                    
                    832
                    
                    
                    
                    129
                    
                    
                    
                    703
                    
                    Ca
                    
                    
                    43
                    
                    
                    
                    29.30
                    
                    
                    
                    0.00MM
      Community Funding IX
                    
                    B1
                    
                    
                    636
                    
                    
                    
                    190
                    
                    
                    
                    446
                    
                    Caa3
                    
                    
                    33
                    
                    
                    
                    42.95
                    
                    
                    
                    0.00$
                    3,768
                    
                    
                    $
                    805
                    
                    
                    $
                    2,963





Significant
components of other income for the second and third quarters of 2010 and 2009
are contained in the following table:





(Dollars in thousands)
                  
                  
                  3Q2010
                  
                  
                  
                  2Q2010
                  
                  
                  
                  3Q2009
                  
                  
                  
                  2Q2009Agency
      profit-sharing revenues
                  
                  $
                  -
                  
                  
                  $
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  8Loan
      fees
                  
                  
                  96
                  
                  
                  
                  102
                  
                  
                  
                  185
                  
                  
                  
                  111Gains
      on student loan sales
                  
                  
                  6
                  
                  
                  
                  77
                  
                  
                  
                  2
                  
                  
                  
                  32Loss
      on bankers bank stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (78
                  )All
      other income
                  
                  
                  322
                  
                  
                  
                  208
                  
                  
                  
                  401
                  
                  
                  
                  333Total
      other income
                  
                  $
                  424
                  
                  
                  $
                  388
                  
                  
                  $
                  488
                  
                  
                  $
                  406





Agency
profit-sharing revenues are profit sharing distributions received by M&F
Insurance Group, Inc. from its underwriting companies generally based on the
amount of business written during the previous year adjusted for claims
incurred.





The
Company has a strategy to increase noninterest revenues as a proportion of total
revenues over time. Noninterest revenues as a percentage of total revenues
decreased from 29.81% in the third quarter of 2009 to 27.42% in the third
quarter of 2010, and decreased from 29.98% in the second quarter of 2010 to
27.42% in the third quarter of 2010. Another metric that the Company monitors is
revenues per full-time employee, which were approximately $35 thousand per
employee for the third and second quarters of 2010 as compared to $34 thousand
for the third quarter of 2009 and $31 thousand for the second quarter of 2009.
Insurance product revenues per producer remained fairly constant at $29 thousand
per producer for the third quarter of 2010 as compared to $28 thousand per
producer for the third quarter of 2009. Management’s strategic focus is to
improve revenues generated per employee while maintaining stability in revenue
growth by increasing the mix of noninterest revenues to total
revenues.


43





FIRST M
& F CORPORATION





Non
Interest Expense





Noninterest
expenses decreased by 7.28% from the third quarter of 2009 to the third quarter
of 2010 and decreased by 1.73% from the second quarter of 2010 to the third
quarter of 2010.





Salary
and benefit expenses, which comprise approximately 50% of noninterest expenses,
decreased by 3.56% from the third quarter of 2009 to the third quarter of 2010
and decreased by .58% from the second quarter of 2010 to the third quarter of
2010. The number of full-time equivalent employees was 497 at September 30,
2010, 498 at June 30, 2010, 523 at September 30, 2009, and 529 at June 30, 2009.
Foreclosed property expenses increased significantly in 2009 over 2008
commensurate with an increase in other real estate foreclosures beginning in the
second half of 2008. Management expects expenses and losses related to
foreclosed properties to continue to be a significant expense through 2010 as
the Company continues to foreclose on non-performing loans and dispose of the
properties in a weak real estate market.





The
components of foreclosed property expenses for the second and third quarters of
2010 and 2009 are contained in the following table:





(Dollars in thousands)
                
                3Q2010
                
                
                2Q2010
                
                
                3Q2009
                
                
                2Q2009(Gains)
      losses on sales of other real estate
                
                $
                (192
                )
                
                $
                (98
                )
                
                $
                37
                
                
                $
                428Write-downs
      of other real estate
                
                
                233
                
                
                
                465
                
                
                
                30
                
                
                
                893Other
      real estate expenses
                
                
                189
                
                
                
                109
                
                
                
                460
                
                
                
                217Rental
      income on other real estate properties
                
                
                (64
                )
                
                
                (57
                )
                
                
                (19
                )
                
                
                (12
                )Total
      foreclosed property expenses
                
                $
                166
                
                
                $
                419
                
                
                $
                508
                
                
                $
                1,526





FDIC
insurance assessments increased by 7.73% from the third quarter of 2009 to the
third quarter of 2010 and decreased by 3.69% from the second quarter of 2010 to
the third quarter of 2010. The primary causes of the increase from the third
quarter of 2009 to the third quarter of 2010 were an increase in deposits, a 10%
increase in assessment rates and an increase in deposits insured in the
Temporary Liquidity Guarantee Program.





Significant
components of other expense for the second and third quarters of 2010 and 2009
are contained in the following table:





(Dollars in thousands)
                
                3Q2010
                
                
                2Q2010
                
                
                3Q2009
                
                
                2Q2009Postage
      and shipping
                
                $
                227
                
                
                $
                212
                
                
                $
                236
                
                
                $
                223Supplies
                
                
                176
                
                
                
                177
                
                
                
                210
                
                
                
                198Legal
      expenses
                
                
                323
                
                
                
                313
                
                
                
                223
                
                
                
                288Other
      professional expenses
                
                
                182
                
                
                
                254
                
                
                
                197
                
                
                
                174Insurance
      expenses
                
                
                238
                
                
                
                114
                
                
                
                239
                
                
                
                82Debit
      card processing expenses
                
                
                208
                
                
                
                178
                
                
                
                157
                
                
                
                146All
      other expenses
                
                
                1,374
                
                
                
                1,309
                
                
                
                1,506
                
                
                
                1,565Total
      other expense
                
                $
                2,728
                
                
                $
                2,557
                
                
                $
                2,768
                
                
                $
                2,676


44





FIRST M
& F CORPORATION





Goodwill
Impairment





Goodwill
is tested for impairment on an annual basis and also when there are indicators
that an impairment may have occurred. There was no impairment recognized as a
result of the goodwill impairment tests performed by the Company through
2008.





The
Company evaluated its goodwill asset as of March 31, 2009 after the stock price
continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share
at March 31, 2009 and as the Company continued to accrue for sizeable losses in
the real estate construction loan portfolio, resulting in unexpected first
quarter net losses. The Company determined that an impairment test of the
community banking unit’s goodwill was needed. The implied fair value of goodwill
was determined after valuing the community banking unit using a weighted average
of (1) a market-based price, (2) a control-premium-based valuation and (3) a
discounted cash flow analysis. The market-based price was the most heavily
weighted valuation component because it involved the most directly observable
data. The market-based value of the Company was determined using historical deal
prices for community banks, adjusted for bank size and credit quality factors.
The valuation analysis resulted in a fair value of the community banking unit
that was less than the book value by approximately $17 million. In contrast, the
December 2008 test, based on discounted cash flow analysis, had resulted in a
fair value in excess of book value by approximately $6 million. Therefore, the
March 2009 test, with net assets of the community banking unit exceeding their
estimated fair value, required a second step assigning individual fair values to
identified assets and liabilities to determine if the goodwill asset was
impaired. After fair values were assigned to the identifiable assets and
liabilities, the residual amount that was assigned to goodwill, its implied fair
value, was approximately $15.800 million less than its book value. The implied
fair value of goodwill was estimated to be $16.772 million, requiring an
impairment charge of $15.800 million.





Management
continued to monitor the Company’s stock price throughout 2009. As the stock
price dropped below $3.00 per share in October and beyond, management decided to
perform a fourth quarter goodwill impairment test. The test was performed as of
December 31, 2009. The fourth quarter impairment test was performed using the
same methodologies as the March 31, 2009 test. The first step of the impairment
test was to determine the fair value of the community banking unit, which was
defined as the consolidated company consistent with the March 31, 2009 test.
Three different valuation methodologies were used, resulting in a weighted
average calculation of fair value. The methodologies were (1) a market-based
comparable transactions method, (2) a control premium method and (3) a
discounted cash flow method. The comparable transactions approach used bank
acquisition multiples for deals during 2009 for banks with high nonperforming
asset percentages. Since the Company’s nonperforming assets were larger as a
percentage of assets than those of the acquired institutions in 2009, a downward
adjustment was made to reflect the estimated effect of the lower asset quality
on the pricing of a deal. The adjustment was based on the judgment of investment
bankers who are familiar with financial institution merger and acquisition
activity. The comparable transaction approach resulted in a valuation of $65
million for the community banking unit. The control premium approach used the
quoted trading price of the Company’s stock and adjusted it for control premiums
paid in financial institution merger transactions that were observed over the
course of 2009. The average observed premiums were in a range of 56.0% to 59.7%
with median premiums in a 36.6% to 36.9% range. A premium of 45% was determined
to be a reasonable estimate, which resulted in a valuation of $28 million. The
discounted cash flow approach used estimated cash flows for a five-year forecast
period based on the Company’s financial forecasts, the repayment of the TARP CPP
funds, and a terminal value based on the median transaction price for banks in
the southeast over the last three years. The cash flows were discounted at an
expected market return of approximately 14.5%, resulting in a valuation of $121
million. The three methodologies were weighted with more of the weight being
allocated to the methods using observable market transactions and less weight
allocated to the discounted cash flow approach. The final valuation, which was
determined to be categorized as using Level 3 inputs, was $60 million. Since the
estimated fair value was less than the Company’s carrying value of common
stockholders’ equity, the second step of the goodwill impairment test was
carried out. The second step consists of allocating the estimated fair value to
the assets and liabilities of the community banking unit, based upon the
reporting unit’s asset and liability fair values. The fair values of loans,
deposits and other borrowings were determined using discounted cash flow
methodologies and market discount rates. The fair value of investments was
determined using the pricing as disclosed in Note 2 – Fair Value in the
financial statements. The fair value of the subordinated debentures was
determined using observed market prices for trust preferred securities. The core
deposit intangible asset value was determined by discounting the difference
between the cash flows of the non-time deposit base and comparable borrowings
using the Company’s estimated weighted average cost of capital. The cash flows
used for the loan portfolio valuation were adjusted for credit-related
deterioration related to construction loans, delinquent loans and nonaccrual
loans. The net amount of the fair values of assets and liabilities individually
determined exceeded the $60 million estimated fair value of the community
banking unit. Therefore, there was no value to allocate to goodwill. This
resulted in the impairment write-off of the remaining balance of goodwill of
$16.772 million at December 31, 2009.


45





FIRST M
& F CORPORATION





Intangible
asset impairments





The
banking charter intangible asset is a Florida charter acquired in November,
2006. The significant slowdown in the economy, especially in areas with
historically heavy construction activity, throughout 2008 and into 2009 affected
the Company’s ability to grow its business in the Florida panhandle. As Florida
markets became less attractive due to their exposure to the slowdown in housing
and deteriorating conditions in the construction market, the Company observed
fewer entities desiring to enter most Florida markets. When management decided
to test the goodwill asset in March 2009, it decided to evaluate the banking
charter and the insurance agency customer lists and noncompete agreements.
Management determined that the Florida banking charter was fully impaired.
Therefore, the Company charged $1.025 million to intangible asset amortization
to write off the banking charter.





The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. The majority of the
customer renewal assets were acquired in merger transactions that occurred
between 1998 and 2001. Based on estimates of expected future cash flows related
to the customer renewal lists and noncompete agreements, management determined
that the renewal values and the value of the noncompete agreements were fully
impaired. Therefore, the Company charged $191 thousand for customer renewal
lists and $32 thousand for noncompete agreements to intangible asset
amortization to fully write off the remaining balances of the
assets.





Income
Taxes





The
average tax rate for the first nine months of 2010 was 19.74%. The Company paid
approximately $217 thousand in assessments related to an audit of its
Mississippi returns for the tax years 2005 through 2007. The effect of the
assessment on income tax expense, net of resulting refunds due from other state
jurisdictions for the same tax years, was $88 thousand.





Due to a
significant addition to the provision for loan losses, a non-tax deductible
goodwill impairment charge and other intangible asset impairments the Company
incurred pre-tax losses and accrued an income tax benefit for the first nine
months of 2009. At September 30, 2010, the Company had a current tax benefit
receivable of $8.498 million and a deferred tax asset of $13.186 million. Over
the past five years prior to 2009 the Company had paid annual federal taxes
ranging from $3.500 million to $5.200 million. Management expects that the
current tax benefits generated due to the 2008 and 2009 credit-related losses
will be realized through carry-backs to prior tax years and through
carry-forwards. Management has also reviewed its deferred tax assets and
determined that it is more likely than not that the deferred tax assets will be
realized and therefore no valuation allowance has been accrued. The Company
expects to utilize the tax benefits implicit in the deferred tax asset in the
foreseeable future when (1) current tax benefits increase as losses are realized
through loan charge-offs and collateral foreclosures and dispositions and (2)
future earnings become sufficient to absorb the deductions. The following table
shows the differences between actual income tax expense (benefit) and expected
income tax expense (benefit), listing significant items that affected the
average tax rate for each period:





(Dollars in thousands)
                  
                  Three Months Ended September 30
                  
                  
                  Nine Months Ended September 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Amount
      computed using the Federal statutory rates on income (loss) before
      taxes
                  
                  $
                  561
                  
                  
                  $
                  (432
                  )
                  
                  $
                  1,427
                  
                  
                  $
                  (14,922
                  )Increase
      (decrease) resulting from:State
      income tax expense (benefit), net of Federal effect
                  
                  
                  32
                  
                  
                  
                  (112
                  )
                  
                  
                  219
                  
                  
                  
                  (1,067
                  )Tax
      exempt income, net of disallowed interest deduction
                  
                  
                  (144
                  )
                  
                  
                  (193
                  )
                  
                  
                  (457
                  )
                  
                  
                  (586
                  )Life
      insurance income
                  
                  
                  (48
                  )
                  
                  
                  (68
                  )
                  
                  
                  (164
                  )
                  
                  
                  (192
                  )Goodwill
      impairment expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,372Low
      income housing tax credits
                  
                  
                  (83
                  )
                  
                  
                  -
                  
                  
                  
                  (248
                  )
                  
                  
                  -Other,
      net
                  
                  
                  89
                  
                  
                  
                  (332
                  )
                  
                  
                  51
                  
                  
                  
                  6Total
      income tax expense (benefit)
                  
                  $
                  407
                  
                  
                  $
                  (1,137
                  )
                  
                  $
                  828
                  
                  
                  $
                  (11,389
                  )





The
Company had no material recognized uncertain tax positions as of September 30,
2009 or 2010 and therefore did not have any tax accruals during the third
quarters of 2009 or 2010 related to uncertain positions.


46





FIRST M
& F CORPORATION





Assets
and Liabilities





Assets
decreased by 7.74% from September 30, 2009 to September 30, 2010, and decreased
by 7.00% from December 31, 2009. Investments decreased by 10.17% from September
30, 2009 to September 30, 2010, and decreased by 4.25% from December 31,
2009.





The
following table shows net changes in the major balance sheet categories for the
quarter-to-date and year-to-date as of September 30, 2010 and 2009.





September 30, 2010
                    
                    
                    September 30, 2009(Dollars in thousands)
                    
                    Net Change
                    
                    
                    Net ChangeQTD
                    
                    
                    YTD
                    
                    
                    QTD
                    
                    
                    YTDCash
      and due from banks
                    
                    $
                    2,019
                    
                    
                    $
                    (6,214
                    )
                    
                    $
                    (3,319
                    )
                    
                    $
                    (8,929
                    )Interest-bearing
      bank balancesand
      Federal funds sold
                    
                    
                    (26,545
                    )
                    
                    
                    (96,906
                    )
                    
                    
                    85,126
                    
                    
                    
                    92,028Securities
      available for sale
                    
                    
                    (10,041
                    )
                    
                    
                    (12,083
                    )
                    
                    
                    (27,620
                    )
                    
                    
                    76,160Loans
      held for sale
                    
                    
                    (591
                    )
                    
                    
                    (6,373
                    )
                    
                    
                    1,829
                    
                    
                    
                    (972
                    )Loans
      held for investment
                    
                    
                    8,898
                    
                    
                    
                    (11,327
                    )
                    
                    
                    (8,633
                    )
                    
                    
                    (77,487
                    )Allowance
      for loan losses
                    
                    
                    (1,776
                    )
                    
                    
                    3,937
                    
                    
                    
                    (1,372
                    )
                    
                    
                    (7,777
                    )Other
      real estate
                    
                    
                    7,400
                    
                    
                    
                    15,053
                    
                    
                    
                    5,539
                    
                    
                    
                    17,053Other
      assets
                    
                    
                    (1,119
                    )
                    
                    
                    (2,420
                    )
                    
                    
                    (404
                    )
                    
                    
                    (10,472
                    )Total
      assets
                    
                    $
                    (21,755
                    )
                    
                    $
                    (116,333
                    )
                    
                    $
                    51,146
                    
                    
                    $
                    79,604Total
      deposits
                    
                    
                    (21,932
                    )
                    
                    
                    (66,384
                    )
                    
                    
                    47,270
                    
                    
                    
                    95,430Total
      borrowings
                    
                    
                    (93
                    )
                    
                    
                    (55,326
                    )
                    
                    
                    3,160
                    
                    
                    
                    (15,360
                    )Other
      liabilities
                    
                    
                    (780
                    )
                    
                    
                    1,250
                    
                    
                    
                    (377
                    )
                    
                    
                    1,752Stockholders’
      equity
                    
                    
                    1,050
                    
                    
                    
                    4,127
                    
                    
                    
                    1,093
                    
                    
                    
                    (2,218
                    )Total
      liabilities and equity
                    
                    $
                    (21,755
                    )
                    
                    $
                    (116,333
                    )
                    
                    $
                    51,146
                    
                    
                    $
                    79,604





During
2010 short-term interest-bearing assets were used to fund decreases in deposits
and borrowings in an effort to reduce leverage within the balance sheet. In
contrast, liquidity was built up during the first nine months of 2009 with much
of the liquidity accumulation occurring during the third quarter as securities
were liquidated primarily through calls, maturities and principal payments and
as deposits increased. During 2010 the Company purchased approximately $123.543
million of investment securities, evenly distributed between mortgage-backed
securities and securities of U. S. government sponsored enterprises. All of the
purchases were funded through securities sales, calls, maturities and principal
payments. Excess funds from these liquidations, along with short-term
interest-bearing cash balances were used to fund third quarter loan growth and
deposit outflows. Approximately $13.997 million of the securities purchases in
2010 occurred during the third quarter while substantially all of the securities
sales occurred during the first six months.





Construction
loans decreased by 136 in numbers and by $38.180 million in balances during the
first nine months of 2010. During the  third quarter of 2010
construction loans decreased by 41 in numbers and by $9.167 million in balances.
These reductions resulted from management’s continued efforts to cure and remove
problem loans. Other commercial real estate loans increased by $21.123 million
during 2010 with $20.343 million of the increase occurring during the third
quarter. All other loan categories remained relatively unchanged during the
third quarter of 2010. Loans not secured by real estate represented 17.52% of
loans held for investment at September 30, 2010 and 16.50% at December 31, 2009
with most of the increase occurring during the second quarter in the commercial
loan segment. The diversification of the loan portfolio is a continuing effort
as management has re-emphasized small business lending and agricultural lending
and added lenders with small business and SBA expertise as well as timberland
expertise.





Management
expects that the loan portfolio’s change in size over the next year will depend
on the volume of real estate-related and other problem loans that are moved out
of the portfolio as well as the strength of the economy as it relates to
consumer, small business and timber loans. Loans as a percent of total assets
were 67.70% at September 30, 2010, 63.64% at December 31, 2009, and 65.56% at
September 30, 2009.


47





FIRST M
& F CORPORATION





The
following table shows loans held for investment by type as of September 30,
2010, December 31, 2009, and September 30, 2009:





(Dollars in thousands)
                    
                    September 30, 2010
                    
                    
                    December 31, 2009
                    
                    
                    September 30, 2009Commercial
      real estate
                    
                    $
                    626,747
                    
                    
                    $
                    643,804
                    
                    
                    $
                    677,777Residential
      real estate
                    
                    
                    196,299
                    
                    
                    
                    195,361
                    
                    
                    
                    197,760Home
      equity lines
                    
                    
                    40,523
                    
                    
                    
                    44,560
                    
                    
                    
                    44,250Commercial,
      financial and agricultural
                    
                    
                    130,596
                    
                    
                    
                    120,415
                    
                    
                    
                    124,836Consumer
                    
                    
                    45,124
                    
                    
                    
                    44,586
                    
                    
                    
                    44,318Other
      loans
                    
                    
                    7,724
                    
                    
                    
                    9,614
                    
                    
                    
                    10,167Total
                    
                    $
                    1,047,013
                    
                    
                    $
                    1,058,340
                    
                    
                    $
                    1,099,108Mortgages
      held for sale
                    
                    $
                    3,893
                    
                    
                    $
                    3,118
                    
                    
                    $
                    2,255Student
      loans held for sale
                    
                    
                    -
                    
                    
                    
                    7,148
                    
                    
                    
                    4,471





Deposits
decreased by 2.57% from September 30, 2009 to September 30, 2010, and decreased
by 4.78% from December 31, 2009. The following table shows the breakdown by
deposit category of core deposit and public funds deposit changes from December
31, 2009 to September 30, 2010:





Core Customers
                
                
                Public Funds
                
                
                Total Deposits(Dollars in thousands)
                
                Increase (Decrease)
                
                
                Increase (Decrease)
                
                
                Increase (Decrease)Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.Noninterest-bearing
                
                $
                (14,096
                )
                
                
                (6.66
                )%
                
                $
                6,073
                
                
                
                35.98
                %
                
                $
                (8,023
                )
                
                
                (3.51
                )%NOW
                
                
                4,087
                
                
                
                1.99
                
                
                
                (6,099
                )
                
                
                (5.85
                )
                
                
                (2,012
                )
                
                
                (0.65
                )MMDA
                
                
                18,226
                
                
                
                13.94
                
                
                
                (16,841
                )
                
                
                (54.69
                )
                
                
                1,385
                
                
                
                0.86Savings
                
                
                4,453
                
                
                
                3.96
                
                
                
                (42
                )
                
                
                (15.16
                )
                
                
                4,411
                
                
                
                3.91Customer
      CDs
                
                
                (38,362
                )
                
                
                (7.42
                )
                
                
                (22,478
                )
                
                
                (56.09
                )
                
                
                (60,840
                )
                
                
                (10.93
                )Brokered
      CDs
                
                
                (3,113
                )
                
                
                (21.02
                )
                
                
                1,808
                
                
                
                42.43
                
                
                
                (1,305
                )
                
                
                (6.84
                )Total
                
                $
                (28,805
                )
                
                
                (2.42
                )%
                
                $
                (37,579
                )
                
                
                (19.12
                )%
                
                $
                (66,384
                )
                
                
                (4.78
                )%





A
decrease in customer certificates of deposit represented 91.65% of the total
2010 year-to-date decrease in deposits. Both core customer deposits and public
funds deposits decreased, with core customer certificates of deposit making up
approximately 63.05% of the total decrease in certificates of deposit. The
decrease resulted primarily from the Company’s more conservative pricing
strategy prompted by the low funding requirements for loan growth. Approximately
half of the year-to-date decrease in certificates of deposit occurred during the
third quarter. MMDA deposits grew by $17.157 million during the third quarter
after having decreased by $15.772 million, almost exclusively in public funds
accounts, during the first half of the year. Approximately $10.804 million of
the third quarter increase occurred in two commercial accounts. Approximately
$7.052 million of the third quarter increase was due to an increase in business
in core customer accounts. Balances in the interest-bearing Summit Checking
account, the sales leader for 2009, increased by $9.684 million for the first
nine months of 2010 and by $854 thousand during the third quarter of 2010.
Summit balances increased by $19.636 million for the first nine months of 2009
and decreased by $578 thousand during the third quarter of 2009. The Summit
Checking account is designed to pay a premium deposit rate if the customer meets
certain criteria related to electronic banking and debit card transaction
activity. Summit accounts are classified as NOW accounts. Noninterest-bearing
deposits represented 16.69% of total deposits at September 30 2010 as compared
to 16.95% at June 30, 2010 and 14.52% at September 30, 2009. The Company’s
long-term strategy is to build the core customer deposit base and rely less on
borrowed funds as a primary source of liquidity. A source of deposits available
to the Company is the brokered CD market which is used when funding is needed
within a short period of time. Additionally, when borrowed funds are less costly
than time deposits or brokered deposits, the Company may still look to those
sources to help maintain the spread between the yield on earning assets and the
cost of funds.


48





FIRST M
& F CORPORATION





The
following table shows the deposit mix as of September 30, 2010, December 31,
2009, and September 30, 2009:





(Dollars in thousands)
                
                September 30, 2010
                
                
                December 31, 2009
                
                
                September 30, 2009Noninterest-bearing
      demand
                
                $
                220,556
                
                
                $
                228,579
                
                
                $
                196,999NOW
      deposits
                
                
                307,533
                
                
                
                309,545
                
                
                
                294,303Money
      market deposits
                
                
                162,955
                
                
                
                161,570
                
                
                
                155,858Savings
      deposits
                
                
                117,175
                
                
                
                112,764
                
                
                
                112,370Certificates
      of deposit
                
                
                495,893
                
                
                
                556,733
                
                
                
                580,878Brokered
      certificates of deposit
                
                
                17,767
                
                
                
                19,072
                
                
                
                16,409Total
                
                $
                1,321,879
                
                
                $
                1,388,263
                
                
                $
                1,356,817





The
following table shows the mix of public funds deposits as of September 30, 2010,
December 31, 2009, and September 30, 2009:





(Dollars in thousands)
                
                September 30, 2010
                
                
                December 31, 2009
                
                
                September 30, 2009Noninterest-bearing
      demand
                
                $
                22,950
                
                
                $
                16,877
                
                
                $
                19,925NOW
      deposits
                
                
                98,148
                
                
                
                104,247
                
                
                
                100,968Money
      market deposits
                
                
                13,952
                
                
                
                30,793
                
                
                
                22,439Savings
      deposits
                
                
                235
                
                
                
                277
                
                
                
                291Certificates
      of deposit
                
                
                17,594
                
                
                
                40,072
                
                
                
                76,998Brokered
      certificates of deposit
                
                
                6,069
                
                
                
                4,261
                
                
                
                3,451Total
                
                $
                158,948
                
                
                $
                196,527
                
                
                $
                224,072





Other
borrowings decreased by $83.610 million from September 30, 2009 to September 30,
2010 and by $72.369 million from December 31, 2009. The decreases in borrowings
were primarily funded through liquidity provided by loan portfolio paydowns,
maturities of investment securities and the use of short-term liquid assets such
as federal funds sold. Amounts of borrowings maturing within one year decreased
from 62.20% of other borrowings at December 31, 2009 to 18.43% at September 30,
2010. Management intends to allow borrowings to decrease as they mature while
deposits are used as a primary source of funding.





In
February 2006 the Company formed First M&F Statutory Trust I for the purpose
of issuing corporation-obligated mandatory redeemable capital securities to
third-party investors and investing the proceeds from the sale of the capital
securities in floating rate junior debentures of the Company. The $30 million in
proceeds were used to fund the acquisition on February 17, 2006 of Columbiana
Bancshares, Inc. The 30-year junior subordinated debentures pay interest
quarterly at a rate of 6.44% fixed for five years, converting then to floating
at a rate equal to three month LIBOR plus 133 basis points. These junior
subordinated debentures, net of the Company’s investment in the variable
interest entity, qualify with certain limitations as Tier 1 capital for
regulatory purposes. The Company expects to have sufficient cash flows to retire
the debt according to its contractual terms.





The
Company is required to seek prior approval from the Federal Reserve Bank of St.
Louis to pay the interest on the subordinated debentures as well as to pay
dividends on its preferred stock.





The
Company uses wholesale funding sources such as the Federal Home Loan Bank to
provide the liquidity needed for loan growth. However, the long-term strategy of
the Company is to primarily fund loan growth through deposit growth first, with
borrowings used when deposit funding is uneconomical or is insufficient in
volume.


49





FIRST M
& F CORPORATION





Equity





The
Company’s and Bank’s regulatory capital ratios at September 30, 2010, as
disclosed in Note 11 to the financial statements, “Regulatory Matters,” are in
excess of the minimum requirements and qualify the institution as “well
capitalized” under the risk-based capital regulations.





Capital
adequacy is continuously monitored by the Company to promote depositor and
investor confidence and provide a solid foundation for future growth of the
organization. The Company has historically kept the dividend payout ratio
between 30% and 45%. Due to operating losses sustained during the fourth quarter
of 2008 and into 2009 and projected losses for the remainder of 2009, the
Company reduced the quarterly dividend rate to $.01 per share beginning in the
second quarter of 2009 after maintaining a $.13 per share quarterly dividend
rate from the second quarter of 2005 through the first quarter of
2009.





The
Company issued 30,000 shares of Class B, Series A Preferred Stock and a warrant
for 513,113 shares of common stock with an exercise price of $8.77 on February
27, 2009 to the U. S. Treasury under the provisions of the TARP Capital Purchase
Program for total proceeds of $30.000 million. Approximately $28.637 million of
the proceeds were allocated to the preferred stock with the remaining $1.363
million being allocated to additional paid-in capital for the common stock
warrant. The preferred stock is treated as Tier 1 capital for risk-based capital
measurement purposes.





The
Capital Purchase Program proceeds were used primarily to inject additional
capital into the Company’s bank subsidiary. The acquisition of these funds has
served, and will continue to serve, (1) to increase the Company’s capital
position, (2) to provide liquidity for the Company’s and bank subsidiary’s
operations and debt service obligations and (3) to act as a buffer against the
effects on capital of future unpredictable events. The additional capital has
also served to support growth in the non-real estate secured commercial loan
portfolio during 2010 and in the consumer loan portfolio during 2009 and
2010.





On
September 29, 2010 the Company issued 30,000 shares of Class B, Series CD
Preferred Stock to the U. S. Treasury to redeem the Series A Preferred Stock.
The Class B, Series CD shares were issued through the U. S. Treasury’s Community
Development Capital Initiative, which is available to Community Development
Financial Institutions. The Company’s banking subsidiary, M&F Bank, was
certified by the U. S. Treasury as a Community Development Financial Institution
(CDFI) on September 28, 2010.





Cumulative
dividends on the Class B, Series CD Preferred Stock will accrue on the $1,000
liquidation preference at a rate of 2% per annum for the first eight years, and
at a rate of 9% per annum thereafter but will be paid only if, as, and when
declared by the Company’s Board of Directors. The rate may increase to 5% in the
event that M&F Bank fails to re-qualify as a CDFI three years after the
initial certification, and that re-qualifying failure remains uncured for 180
days. If the bank continues to fail to re-qualify for an additional 90 days, the
rate increases to 9% until the bank is once again re-qualified as a CDFI. The
Class B, Series CD Preferred Stock has no maturity date and ranks senior to the
Common Stock with respect to the payment of dividends and distributions and
amounts payable upon liquidation, dissolution and winding up of the Company. The
Class B, Series CD Preferred Stock is generally non-voting.





The
Company may redeem the Class B, Series CD Preferred Stock in whole or in part at
$1,000 per share at any time, subject to the consent of the Federal Reserve Bank
of St. Louis, which is the Company’s primary Federal banking regulator, and the
U.S. Treasury Department.





The terms
of the Exchange agreement with the U. S. Treasury specify that the Company may
not pay common dividends in excess of the aggregate per share dividends for the
immediately prior fiscal year. This will limit future dividends to the current
rate of $.01 per share per quarter or $.04 per share per year.





The
Company used funding of $30.000 million through an issuance of trust preferred
securities in early 2006 to acquire Columbiana Bancshares, Inc. in Columbiana,
Alabama. The Company issued debentures to an off-balance-sheet trust that
purchased the debentures with funds raised from issuing trust preferred
securities. The debentures have a 30-year life, pay interest quarterly and are
callable beginning five years after issuance. The debentures pay a fixed rate of
interest for the first five years and pay a floating rate based on LIBOR
thereafter. The debentures, net of the Company’s equity interest in the trust,
are considered Tier 1 capital for risk-based capital ratio purposes. The Company
may elect to defer up to 20 consecutive quarterly payments of interest on the
junior subordinated debentures. During an extension period the Company may not
declare or pay dividends on its common stock, repurchase common stock or repay
any debt that has equal rank or is subordinate to the debentures. The Company is
prohibited from issuing any class of common or preferred stock that is senior to
the junior subordinated debentures during the term of the
debentures.


50





FIRST M
& F CORPORATION





On
November 11, 2009, the Company entered into an informal agreement with the
Federal Reserve Bank of St. Louis (the “Federal Reserve”). The agreement
requires prior approval by the Federal Reserve of (1) the declaration or payment
by First M&F Corporation of dividends to shareholders and (2) the payment of
interest on outstanding trust preferred securities and the payment of dividends
on outstanding TARP preferred stock and (3) the incurrence of additional debt by
First M&F Corporation. The agreement is not a “written agreement” for
purposes of Section 8 of the Federal Deposit Insurance Act, as
amended.





The
Company has a capital plan that includes monthly monitoring of capital adequacy
and projects capital needs out eighteen months. The projections include
assumptions made about earnings, dividends and balance sheet growth and are
adjusted as needed each month. A capital contingency plan is also maintained as
part of the Company’s Strategic Plan and is reviewed with the board of directors
periodically. This plan details steps to be taken in the event of a critical
capital need.





The
Company’s
stock is publicly traded on the NASDAQ Global Select Market, also providing an
avenue for additional capital if it is needed. The Company’s shares have traded
at a rate of approximately 7,000 shares per day during 2010. The stock price was
listed at $3.38 per share on September 30, 2010.





The ratio
of capital to assets stood at 7.03% at September 30, 2010, 6.29% at December 31,
2009, and 7.98% at September 30, 2009, with risk-based capital ratios in excess
of the regulatory requirements. The Company’s regulatory capital ratios for 2010
and 2009 are summarized in Note 11 – Regulatory Matters of the financial
statements included in Item 1, Financial Statements (unaudited)  in
this Form 10-Q.





Interest
Rate Risk and Liquidity Management





Responsibility
for managing the Company’s program for controlling and monitoring interest rate
risk and liquidity risk and for maintaining income stability, given the
Company’s exposure to changes in interest rates, is vested in the
asset/liability committee. Appropriate policy and guidelines, approved by the
board of directors, govern these actions. Monitoring is primarily accomplished
through monthly reviews and analysis of asset and liability repricing
opportunities, market conditions and expectations for the economy. Cash flow
analyses are also used to project short-term interest rate risks and liquidity
risks. Management believes, at September 30, 2010, there is adequate flexibility
to alter the current rate and maturity structures as necessary to minimize the
exposure to changes in interest rates, should they occur. The Company is
currently in a positive gap position for assets and liabilities repricing within
the next year. This generally means that for assets and liabilities maturing and
repricing within the next 12 months, the Company is positioned for more assets
to reprice than the amount of liabilities repricing.





The
asset/liability committee further establishes guidelines, approved by
appropriate board action, by which the current liquidity position of the Company
is monitored to ensure adequate funding capacity. Accessibility to local,
regional and other funding sources is also maintained in order to actively
manage the funding structure that supports the earning assets of the Company.
These sources are primarily correspondent banks, the Federal Home Loan Bank and
the Federal Reserve.


51





FIRST M
& F CORPORATION





Credit
Risk Management





The
Company measures and monitors credit quality on an ongoing basis through credit
committees and the loan review process. Credit standards are approved by the
Board with their adherence monitored during the lending process as well as
through subsequent loan reviews. The Company strives to minimize risk through
the diversification of the portfolio geographically as well as by loan purpose
and collateral. The Company’s credit standards are enforced within the Bank as
well as within all of its wholly-owned and majority-owned
subsidiaries.





Loans
that are not fully collateralized are generally placed into nonaccrual status
when they become past due in excess of ninety days. Loans that are fully
collateralized may remain in accrual status as long as management believes that
the loan will eventually be collected in full. When collateral values are not
sufficient to repay a loan and there are not sufficient other resources for
repayment, management will write the carrying amount of the loan down to the
expected collateral net proceeds through a charge to the allowance for loan
losses. When management determines that a loan is not recoverable the balance is
charged off to the allowance for loan losses. Any subsequent recoveries are
added back to the allowance for loan losses. Overdrawn deposit accounts are
treated as loans and therefore are subject to the Company’s loan policies.
Deposit accounts that are not in the Company’s overdraft protection program and
are overdrawn in excess of thirty days are generally charged-off. Deposits in
the overdraft protection program that have been overdrawn continuously for sixty
days are funded through the offering of a “fresh start” loan with overdraft
privileges being removed. Any fresh start loan that becomes thirty days past due
is charged off to the allowance for loan losses.





The
adequacy of the allowance for loan losses is evaluated quarterly with provision
accruals approved by the Board. Allowance adequacy is dependent on loan
classifications by external examiners and by internal and external loan review
personnel, past due loans, collateral reviews, loan growth and loss history. As
part of this evaluation, individual loans are reviewed for impairment. Loans
with high risk grades, generally implying a substandard classification, are
selected for individual impairment tests. Loan grades are a significant
indicator in determining which loans to individually test for impairment because
the loan grading process incorporates past due status, payment history, customer
financial condition and collateral value in assigning individual grades to
loans. Nonaccrual loans are also generally selected for individual impairment
tests. Loans that have been modified in a troubled debt restructuring are also
selected for individual impairment tests. An impairment exists if management
estimates that it is probable that the Company will be unable to collect all
contractual payments due. For collateral-dependent loans, those for which the
repayment is expected to be provided solely by the underlying collateral,
impairment is based on the value of the related collateral. Otherwise,
impairment is based on the estimated present value of expected cash flows
discounted at the effective interest rate of the loan. The material estimates
necessary in this process make it inherently subjective and make the estimates
subject to significant changes and may add volatility to earnings as provisions
are adjusted. Loans not individually tested for impairment are grouped into
risk-rated pools and evaluated based on historical loss experience. Additionally
management considers specific external credit risk factors (“environmental
factors”) that may not be reflected in historical loss rates such as: (1) a
potential for a slow-down in the real estate market and its effect on real
estate concentrations; (2) trends in loan to value exception rates; (3) general
economic conditions; (4) higher fuel costs; and (5) reviews of underwriting
standards in our various markets. These and other environmental factors are
reviewed on a quarterly basis.


52





FIRST M
& F CORPORATION





The
Company experienced a large increase in the amount of past due and non-accrual
real estate-secured construction and commercial loans during 2008, a trend which
continued through 2009. The trend in nonaccrual and past due loans stabilized in
the fourth quarter of 2009 and into 2010. Management addressed the problem of
liquidating nonperforming loans by creating a special problem asset group within
the organization in 2009, separate from the ongoing credit operations and
lending activities of the Company. Problem loans, including large nonaccrual
loans, have been assigned to this group of specialists with the intent of
liquidating the loans or their collateral in an orderly fashion. Over the course
of 2009 and into 2010 many real estate-secured loans were worked out or
foreclosed on and properties disposed of. With the trend in nonaccrual loans
having moved downward over the past twelve months, the primary challenge will be
to liquidate foreclosed properties to avoid a burdensome build-up of these
non-earning assets as problem loans are either managed back to performing status
or foreclosed on.





Approximately
67.00% of the $37.082 million in nonaccrual loans at September 30, 2010 were in
construction and development and commercial real estate loans. These nonaccrual
balances consisted of several large loans rather than a great many small
loans.





The
following table summarizes the number and amount of nonaccrual construction and
land development loans of $500 thousand or more at the end of each quarter from
September 30, 2009 through September 30, 2010.





(Dollars in thousands)Number of Loans
                
                
                AmountBalance at 09/30/09
                
                
                20
                
                
                $
                36,050Balance
      at 12/31/09
                
                
                13
                
                
                
                19,297Balance
      at 03/31/10
                
                
                10
                
                
                
                14,980Balance
      at 06/30/10
                
                
                9
                
                
                
                13,213Balance
      at 09/30/10
                
                
                7
                
                
                
                8,581





The
following table summarizes the number and amount of nonaccrual commercial real
estate loans of $500 thousand or more at the end of each quarter from September
30, 2009 through September 30, 2010.





(Dollars in thousands)Number of Loans
                
                
                AmountBalance
      at 09/30/09
                
                
                7
                
                
                $
                7,595Balance
      at 12/31/09
                
                
                2
                
                
                
                3,496Balance
      at 03/31/10
                
                
                5
                
                
                
                7,419Balance
      at 06/30/10
                
                
                5
                
                
                
                5,032Balance
      at 09/30/10
                
                
                6
                
                
                
                10,526


53





FIRST M
& F CORPORATION





The
following tables list construction and commercial real estate loans, along with
their impairment allowances, that were in non-accrual status and had balances of
$500 thousand or more at September 30, 2010.





Seven Largest Construction Loans(Dollars in thousands)
                            
                            Non-accrual
                            
                            
                            Charged Off
                            
                            
                            Charged Off
                            
                            
                            ImpairmentNote, Market
                            
                            Balance
                            
                            
                            Prior to 2010
                            
                            
                            In 2010
                            
                            
                            Allowance1.
      Inverness, AL
                            
                            $
                            1,999
                            
                            
                            $
                            1,419
                            
                            
                            $
                            -
                            
                            
                            $
                            -2.
      Inverness, AL
                            
                            
                            1,832
                            
                            
                            
                            -
                            
                            
                            
                            468
                            
                            
                            
                            2503.
      Niceville, FL
                            
                            
                            1,465
                            
                            
                            
                            2,675
                            
                            
                            
                            -
                            
                            
                            
                            -4.
      Inverness, AL
                            
                            
                            1,393
                            
                            
                            
                            1,020
                            
                            
                            
                            -
                            
                            
                            
                            1255.
      Madison, MS
                            
                            
                            803
                            
                            
                            
                            515
                            
                            
                            
                            -
                            
                            
                            
                            -6.
      Brandon, MS
                            
                            
                            586
                            
                            
                            
                            115
                            
                            
                            
                            -
                            
                            
                            
                            3217.
      Chelsea, AL
                            
                            
                            504
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            161Totals
                            
                            $
                            8,582
                            
                            
                            $
                            5,744
                            
                            
                            $
                            468
                            
                            
                            $
                            857





Six Largest Commercial Real Estate Loans(Dollars in thousands)
                              
                              Non-accrual
                              
                              
                              Charged Off
                              
                              
                              Charged Off
                              
                              
                              ImpairmentNote, Market
                              
                              Balance
                              
                              
                              Prior to 2010
                              
                              
                              In 2010
                              
                              
                              Allowance8.
      Niceville, FL
                              
                              $
                              2,700
                              
                              
                              $
                              -
                              
                              
                              $
                              1,360
                              
                              
                              $
                              3039.
      Niceville, FL
                              
                              
                              2,455
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              20010.
      Cordova, TN
                              
                              
                              2,123
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              77811.
      Southaven, MS
                              
                              
                              2,097
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -12.
      Niceville, FL
                              
                              
                              598
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -13.
      Olive Branch, MS
                              
                              
                              552
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Totals
                              
                              $
                              10,525
                              
                              
                              $
                              -
                              
                              
                              $
                              1,360
                              
                              
                              $
                              1,281


54





FIRST M
& F CORPORATION





The
following table summarizes information relevant to the impairment determinations
for the seven largest construction and development loans and the six largest
commercial real estate loans that were in non-accrual status at September 30,
2010.





Non-accrual
                                
                                
                                Impairment
                                
                                Information(Dollars in thousands)
                                
                                Type of
                                
                                Type of
                                
                                Balance
                                
                                
                                Allowance
                                
                                SupportingNote, Market
                                
                                Borrower
                                
                                Collateral
                                
                                09/30/10
                                
                                
                                09/30/10
                                
                                Allowance1.
      Inverness, AL
                                
                                Commercial
      Developer
                                
                                Commercial
      Subdivision
                                
                                $
                                1,999
                                
                                
                                $
                                -
                                
                                Appraisal
      dated 09/29/102.
      Inverness, AL
                                
                                Commercial
      Developer
                                
                                Commercial
                                
                                
                                1,832
                                
                                
                                
                                250
                                
                                Appraisal
      dated 05/14/093.
      Niceville, FL
                                
                                Residential
      Developer
                                
                                Residential
      Subdivision
                                
                                
                                1,465
                                
                                
                                
                                -
                                
                                Appraisal
      dated 11/23/094.
      Inverness, AL
                                
                                Commercial
      Developer
                                
                                Commercial
                                
                                
                                1,393
                                
                                
                                
                                125
                                
                                Appraisal
      dated 10/03/085.
      Madison, MS
                                
                                Residential
      Developer
                                
                                Residential
      Subdivision
                                
                                
                                803
                                
                                
                                
                                -
                                
                                Appraisal
      dated 09/30/096.
      Brandon,  MS
                                
                                Commercial
      Developer
                                
                                Vacant
      Land
                                
                                
                                586
                                
                                
                                
                                321
                                
                                Appraisal
      dated 03/28/077.
      Chelsea, AL
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                504
                                
                                
                                
                                161
                                
                                Appraisal
      dated 08/19/108.
      Niceville, FL
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                2,700
                                
                                
                                
                                303
                                
                                Appraisal
      dated 02/24/109.
      Niceville, FL
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                2,455
                                
                                
                                
                                200
                                
                                Appraisal
      dated 03/02/0910.
      Cordova, TN
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                2,123
                                
                                
                                
                                778
                                
                                Appraisal
      dated 06/23/0911.
      Southaven, MS
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                2,097
                                
                                
                                
                                -
                                
                                Appraisal
      dated 05/06/0912.
      Niceville, FL
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                598
                                
                                
                                
                                -
                                
                                Appraisal
      dated 01/30/0913.
      Olive Branch, MS
                                
                                Commercial
                                
                                Commercial
      Property
                                
                                
                                552
                                
                                
                                
                                -
                                
                                Appraisal
      dated
07/08/10





Additions
to the impairment allowance and the non-accrual loan balances in 2009 occurred
primarily in construction and land development loans. Many of these loans were
foreclosed on during 2009 and into 2010. Many remaining nonaccrual loans were
written down to their collateral values, resulting in smaller allowances for
loan losses remaining for nonaccrual loans at the end of 2009 and at September
30, 2010.


55





FIRST M
& F CORPORATION





The
following table shows a distribution of the totals for construction loans
evaluated for impairment and the impairment allowances allocated to those loans
at September 30, 2010 and December 31, 2009.





September 30, 2010
                
                
                December 31, 2009(Dollars in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                11,887
                
                
                $
                886
                
                
                $
                25,655
                
                
                $
                36Accruing
      loans with an allowance
                
                
                12,534
                
                
                
                2,725
                
                
                
                16,646
                
                
                
                6,028Accruing
      loans without an allowance
                
                
                12,519
                
                
                
                -
                
                
                
                11,758
                
                
                
                -Total
                
                $
                36,940
                
                
                $
                3,611
                
                
                $
                54,059
                
                
                $
                6,064





The
following table shows a distribution of the totals for commercial real estate
loans evaluated for impairment and the impairment allowances allocated to those
loans at September 30, 2010 and December 31, 2009.





September 30, 2010
                
                
                December 31, 2009(Dollars in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                12,958
                
                
                $
                1,281
                
                
                $
                5,001
                
                
                $
                -Accruing
      loans with an allowance
                
                
                4,277
                
                
                
                895
                
                
                
                19,962
                
                
                
                3,621Accruing
      loans without an allowance
                
                
                38,402
                
                
                
                -
                
                
                
                23,149
                
                
                
                -Total
                
                $
                55,637
                
                
                $
                2,176
                
                
                $
                48,112
                
                
                $
                3,621





Included
in the accruing loans that had impairments at the end of 2009, one in the
Oxford, Mississippi market had an outstanding balance of $9.761 million with an
impairment allowance of $1.405 million. Another significant loan with an
impairment allowance at the end of 2009 was a loan in the Niceville, Florida
market with an outstanding balance of $4.060 million and an impairment allowance
of $870 thousand. Both loans were subsequently written down during the first
quarter of 2010 by a total amount of $2.765 million and did not require an
impairment allowance as of March 31, 2010. During the second quarter of 2010 an
accruing loan in the Madison, Mississippi market with an outstanding balance of
$8.517 million was added to the impaired loan inventory with no impairment
allowance required. The Oxford and Madison, Mississippi loans made up the
majority of the increase from December 31, 2009 to September 30, 2010 in the
balance of impaired commercial real estate loans not requiring an
allowance.


56





FIRST M
& F CORPORATION





The
following table shows the trend in credit quality related to the largest
segments of the real estate loan portfolio.





Past Due
                
                
                Past Due30 – 89
                
                
                90 DaysDays
                
                
                Or More
                
                
                
                
                
                Year-To-(Dollars in thousands)
                
                Outstanding
                
                
                And Still
                
                
                And Still
                
                
                
                
                
                Date NetBalances
                
                
                Accruing
                
                
                Accruing
                
                
                Nonaccrual
                
                
                Charge-OffsConstruction
      and development loans:09/30/10
                
                $
                96,848
                
                
                $
                979
                
                
                $
                430
                
                
                $
                11,887
                
                
                $
                2,62806/30/10
                
                
                106,015
                
                
                
                2,495
                
                
                
                79
                
                
                
                17,092
                
                
                
                2,81603/31/10
                
                
                108,574
                
                
                
                2,434
                
                
                
                352
                
                
                
                20,363
                
                
                
                85212/31/09
                
                
                123,254
                
                
                
                3,119
                
                
                
                901
                
                
                
                25,655
                
                
                
                38,713Loans
      secured by 1-4 family properties:09/30/10
                
                $
                236,822
                
                
                $
                2,422
                
                
                $
                319
                
                
                $
                5,001
                
                
                $
                93606/30/10
                
                
                237,801
                
                
                
                2,538
                
                
                
                123
                
                
                
                4,106
                
                
                
                81203/31/10
                
                
                238,904
                
                
                
                2,984
                
                
                
                440
                
                
                
                4,545
                
                
                
                28812/31/09
                
                
                239,921
                
                
                
                4,512
                
                
                
                312
                
                
                
                4,490
                
                
                
                3,362Commercial
      real estate-secured loans:09/30/10
                
                $
                446,511
                
                
                $
                2,133
                
                
                $
                44
                
                
                $
                12,958
                
                
                $
                3,15306/30/10
                
                
                433,409
                
                
                
                5,949
                
                
                
                -
                
                
                
                7,122
                
                
                
                3,13103/31/10
                
                
                437,642
                
                
                
                7,516
                
                
                
                46
                
                
                
                8,453
                
                
                
                3,13212/31/09
                
                
                440,560
                
                
                
                12,555
                
                
                
                1,208
                
                
                
                5,001
                
                
                
                2,611





The
following table shows overall statistics for non-performing loans and other
assets of the Company:





(Dollars in thousands)
                
                September 30
                
                
                December 31
                
                
                September 302010
                
                
                2009
                
                
                2009Nonaccrual
      loans
                
                $
                37,082
                
                
                $
                44,549
                
                
                $
                69,019Other
      real estate
                
                
                38,631
                
                
                
                23,578
                
                
                
                28,114Nonaccrual
      investment securities
                
                
                596
                
                
                
                825
                
                
                
                610Total
      non-performing assets
                
                $
                76,309
                
                
                $
                68,952
                
                
                $
                97,743Past
      due 90 days or more and still accruing interest
                
                $
                858
                
                
                $
                2,479
                
                
                $
                6,351Restructured
      loans (accruing)
                
                
                18,518
                
                
                
                4,620
                
                
                
                3,664Ratios:Nonaccrual
      loans to loans
                
                
                3.53
                %
                
                
                4.17
                %
                
                
                6.24
                %Past
      due 90 day loans to loans
                
                
                .08
                %
                
                
                .23
                %
                
                
                .57
                %Non-performing
      credit assets to loans and other real estate
                
                
                6.95
                %
                
                
                6.24
                %
                
                
                8.57
                %Non-performing
      assets to assets
                
                
                4.93
                %
                
                
                4.15
                %
                
                
                5.83
                %





The
Company is still in the process, begun in 2008, of working through the negative
effects of the real estate downturn. The length and depth of any further
deterioration will depend on the strength of the economy and of the housing and
commercial real estate sectors. A continued deterioration in real estate values
could result in further impairments, resulting in additional write-downs of
loans. Management does not know of any additional material contingencies that
could negatively affect the remainder of the loan portfolio during
2010.





The
Company has not been negatively affected to date by the deterioration of credit
quality in the sub-prime mortgage sector. Substantially all of originated
mortgages are sold to mortgage investors and must meet potential investors’
underwriting guidelines. Mortgages retained by the Company must meet the
Company’s underwriting guidelines. The Company does not offer a subprime
product.  Accordingly, the Company has virtually no direct sub-prime
exposure. Loans with features that increase credit risk, such as high loan to
value ratios, must meet minimum credit score, income and employment guidelines
in order to mitigate the increased risk.





In an
effort to address and change the risk profile of the Company’s balance sheet,
management has decided to de-emphasize residential and commercial construction
loans and re-emphasize consumer, small business and certain agricultural
loans.


57





FIRST M
& F CORPORATION





Off-Balance
Sheet Arrangements





The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At September 30, 2010, the Company
had $125.496 million in unused loan commitments outstanding. Of these
commitments, $91.818 million mature in one year or less. Lines of credit are
established using the credit policy of the Company concerning the lending of
money.





Letters
of credit are used to facilitate the borrowers’ business and are usually related
to the acquisition of inventory or of assets to be used in the customers’
business. Letters of credit are generally secured and are underwritten using the
same standards as traditional commercial loans. Most standby letters of credit
expire without being presented for payment. However, the presentment of a
standby letter of credit would create a loan receivable from the Bank’s loan
customer. The Bank’s asset-based lending subsidiary uses commercial letters of
credit to facilitate the purchase of inventory items by its customers. There
were no commercial letters of credit outstanding at the end of the third
quarter. At September 30, 2010, the Company had $6.182 million in financial
standby letters of credit issued and outstanding.





At
September 30, 2010, there were no standby letters of credit issued on the
Company’s behalf by a Federal Home Loan Bank (FHLB). At December 31, 2009, there
were $100 thousand in standby letters of credit issued on the Company’s behalf
by a Federal Home Loan Bank (FHLB). The Company typically uses these letters of
credit as additional collateral on public funds deposits and is obligated to the
Federal Home Loan Bank if the letters of credit must be drawn upon.





Liabilities
of $16 thousand at September 30, 2010 and $37 thousand at September 30, 2009 are
recognized in Other Liabilities related to the obligation to stand ready to
perform related to standby letters of credit.





The
Company makes commitments to originate mortgage loans that will be held for
sale. The total commitments to originate mortgages to be held for sale were
$6.551 million at September 30, 2010. These commitments are accounted for as
derivatives and are marked to fair value with changes in fair value recorded in
mortgage banking income. At September 30, 2010, mortgage origination-related
derivatives with positive fair values of $9 thousand were included in other
assets and derivatives with negative fair values of $26 thousand were included
in other liabilities.





The
Company also engages in forward sales contracts with mortgage investors to
purchase mortgages held for sale. Those forward sale agreements that have a
determined price and expiration date are accounted for as derivatives and marked
to fair value through mortgage banking income. At September 30, 2010, the
Company had $7.054 million in locked forward sales agreements in place. At
September 30, 2010, forward sale-related derivatives with positive fair values
of $18 thousand were included in other assets and derivatives with negative fair
values of $18 thousand were included in other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. The
Company may also be required to repurchase mortgages that do not conform to FNMA
or FHA underwriting standards or that contain critical documentation errors or
fraud. The Company has not sustained any recourse-related losses in its mortgage
program and the repurchase of mortgages has been an extremely rare event.
Mortgages sold that had not reached the first payment date were $7.758 million
at September 30, 2010. No recourse liability was recorded for these
mortgages.





In the
ordinary course of business the Company enters into rental and lease agreements
to secure office space and equipment. The Company has a variety of lease
agreements in place, all of which are operating leases. The largest lease
obligations are for office space.


58





FIRST M
& F CORPORATION





Critical
Accounting Policies





Management’s
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States and general practices within the financial services
industry. The preparation of the financial statements requires management to
make certain judgments and assumptions in determining accounting estimates that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and obligations. Management evaluates
these judgments and estimates on an ongoing basis to determine if changes are
needed. Management believes that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
the Company’s consolidated financial statements.





(1)
            Allowance
      for loan losses


(2)
            Fair
      value


(3)
            Goodwill,
      intangible assets and related
impairment


(4)
            Contingent
      liabilities


(5)
            Income
      taxes





Allowance for loan
losses





The
Company’s policy is to maintain the allowance for loan losses at a level that is
sufficient to absorb estimated probable losses in the loan portfolio. Accounting
standards require that loan losses be recorded when management determines it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. Management’s estimate is reflected in the balance of the
allowance for loan losses. Changes in this estimate can materially affect the
provision for loan losses, and thus net income.





Management
of the Company evaluates many factors in determining the estimate for the
allowance for loan losses. Management reviews loan quality on an ongoing basis
to determine the collectability of individual loans and reflects that
collectability by assigning loan grades to individual credits. The grades will
generally determine how closely a loan will be monitored on an ongoing basis. A
customer’s payment history, financial statements, cash flow patterns and
collateral, among other factors, are reviewed to determine if the loan has
potential losses. Such information is used to determine if individual loans are
impaired and to group remaining loans into risk pools. A loan is impaired if
management estimates that it is probable that the Company will be unable to
collect all contractual payments due. Impairment estimates may be based on
discounted cash flows or collateral. Historical loan losses by loan type and
loan grade are also a significant factor in estimating future losses when
applied to the risk pools of loans not individually tested for impairment.
Various external environmental factors are also considered in estimating the
allowance. Concentrations of credit by loan type and collateral type are also
reviewed to estimate exposures and risks of loss. General economic factors as
well as economic factors for individual industries or factors that would affect
certain types of loan collateral are reviewed to determine the exposure of loans
to economic fluctuations. The Company has a loan review department that audits
types of loans as well as geographic segments to determine credit problems and
loan policy violations that require the attention of management. All of these
factors are used to determine the adequacy of the allowance for loan losses and
adjust its balance accordingly.





The
allowance for loan losses is increased by the amount of the provision for loan
losses and by recoveries of previously charged-off loans. It is decreased by
loan charge-offs as they occur when principal is deemed to be
uncollectible.


59





FIRST M
& F CORPORATION





Fair
Value





Certain
of the Company’s assets and liabilities are financial instruments carried at
fair value. This includes securities available for sale and mortgage-related
derivatives. Most of the assets and liabilities carried at fair value are based
on either quoted market prices, market prices for similar instruments or market
data for the instruments being valued. At September 30, 2010, less than 1% of
assets measured at fair value were based on significant unobservable
inputs.





The fair
values of available-for-sale securities are generally based upon quoted market
prices or observable market data related to those securities. These values take
into account recent market activity as well as other market observable data such
as interest rate, spread and prepayment information. When market observable data
is not available, which generally occurs due to the lack of liquidity for
certain instruments, the valuation of the security is subjective and may involve
substantial judgment. This is the case for certain trust-preferred-backed
collateralized debt obligations that are held in the investment
portfolio.





The
Company reviews the investment securities portfolio to identify and evaluate
securities that have unrealized losses for other-than-temporary impairment. An
unrealized loss exists when the current fair value of an individual security is
less than its amortized cost basis. The primary factors that the Company
considers in determining whether an impairment is other-than-temporary are the
financial condition and projected performance of the issuer, the length of time
and extent to which the security has had an unrealized loss, and the Company’s
intent to sell and assessment of the likelihood that the Company would be
required to sell the security before it could recover its cost. For beneficial
interests such as collateralized debt obligations the Company uses the
prescribed expected cash flow analysis as well as its intent related to the
disposition of its investment to determine whether an other-than-temporary
impairment exists.





The
Company enters into interest rate lock agreements with customers during the
mortgage origination process. These interest rate lock agreements are considered
written options and are accounted for as derivatives. The Company also enters
into forward sale agreements with investors who purchase originated mortgages.
These forward sale agreements are also considered derivatives. Derivatives are
accounted for at fair value with changes flowing through current earnings. The
Company values interest rate lock agreements using the current 30-year and
15-year mortgage rates as a discount rate and adjusts cash flows based on dealer
quoted pricing adjustments for certain credit characteristics of the commitments
and estimated pull-through rates. The Company values forward sale agreements
based on an average of investor quotes for mortgage commitments with similar
characteristics with adjustments made for estimated servicing
values.





Other
real estate acquired through partial or total satisfaction of loans is carried
at the lower of fair value, net of estimated costs to sell, or cost. The
original cost of other real estate is recognized as the lesser of fair value of
the property, net of estimated costs to sell, or the recorded loan balance at
the date of acquisition (foreclosure). Any loss incurred at the date of
acquisition is charged to the allowance for loan losses. The fair values of
other real estate are usually based on appraisals by third parties. These fair
values may also be adjusted for other market data that the Company becomes aware
of.





Goodwill, intangible assets
and related impairment





The
policy of First M&F Corporation is to assess goodwill for impairment at the
reporting unit level on an annual basis. Impairment is the condition that exists
when the carrying amount of goodwill exceeds its implied fair value. Accounting
standards require management to estimate the fair value of each reporting unit
in making an annual assessment of impairment. Management performs this
assessment as of January 1 of each year. An assessment of impairment is also
performed when circumstances or events indicate that an impairment of goodwill
may be evident.





Impairment
of goodwill is recognized by a charge against earnings and is shown as a
separate line item in the noninterest expense section of the consolidated
statement of operations.





The
estimate of fair value is dependent on such assumptions as: (1) future cash
flows determined from the budget, strategic plan, and forecasts of growth, (2)
discount rates and earnings multiples used to determine the present value of
those cash flows and (3) pricing and premium values based on market activity
related to bank acquisitions. Management relies on third-party experts to
perform procedures related to the steps involved in goodwill impairment testing
to help management determine the existence and extent of any goodwill impairment
of a reporting unit.





Identifiable
intangible assets are amortized over their estimated lives. Identifiable
intangible assets that have indefinite lives are not amortized until such time
that their estimated lives are determinable. Intangible assets with indefinite
lives must be assessed for impairment annually and whenever events or
circumstances indicate that an impairment may exist.


60





FIRST M
& F CORPORATION





Contingent
liabilities





Accounting
standards require that a liability be recorded if management determines that it
is probable that a loss has occurred and the loss can be reasonably estimated.
Management must estimate the probability of occurrence and estimate the
potential exposure of a variety of contingencies such as health claims, legal
claims, tax liabilities and other potential claims against the Company’s assets
or requirements to perform services in the future.





Management’s
estimates are based upon their judgment concerning future events and their
potential exposures. However, there can be no assurance that future events, such
as changes in a regulator’s position or court cases will not differ from
management’s assessments. When management, based upon current facts and expert
advice, believes that an event is probable and reasonably estimable, it accrues
a liability in the consolidated financial statements. That liability is adjusted
as facts and circumstances change and subsequent assessments produce a different
estimate.





Income
Taxes





The
Company, the Bank and the Bank's wholly owned subsidiaries, except for the
credit insurance subsidiary, file consolidated Federal and state income tax
returns. The estimates that pertain to the income tax expense or benefit and the
related current and deferred tax assets and liabilities involves a high degree
of judgment related to the ultimate measurement and resolution of tax-related
matters. Management determines the appropriate tax treatment of transactions and
filing positions based on reviews of tax laws and regulations, court actions and
other relevant information. These judgments enter into the estimate of current
and deferred tax expenses or benefits and the related current and deferred tax
assets and liabilities. Changes in these estimates occur as tax rates, tax laws
or regulations change, as court decisions change the merits of certain tax
treatments and as examinations by taxing authorities change our treatments of
tax items. These changes impact tax accruals and can materially affect our
operating results. Management regularly evaluates our uncertain tax positions
and estimates the appropriate level of tax accrual adjustments based on these
evaluations.





Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Deferred income tax expenses (benefits) result from changes in
deferred tax assets and liabilities between reporting periods. A valuation
allowance, if needed, reduces deferred tax assets to the expected amount most
likely to be realized. Realization of deferred tax assets is dependent upon the
generation of a sufficient level of future taxable income and the recoverability
of taxes paid in prior years. In determining whether a valuation allowance is
needed, management considers (1) the amount of taxable income from prior years
that may be used for carrybacks, (2) estimated future taxable earnings and (3)
the effects of tax planning strategies.





Interest
and penalties assessed by the taxing authorities are classified as income tax
expense in the statement of operations.


61





FIRST M
& F CORPORATION





Recent
Accounting Pronouncements





Accounting Standards Update (ASU)
No. 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of
Financial Assets.”ASU 2009-16 amends prior accounting guidance to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. ASU 2009-16 eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. ASU 2009-16 also requires additional disclosures
about all continuing involvements with transferred financial assets including
information about gains and losses resulting from transfers during the period.
The provisions of ASU 2009-16 became effective on January 1, 2010 and did not
have a material impact on the Company’s financial position or results of
operations.





Accounting Standards Update No.
2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends
prior guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. ASU
2009-17 requires additional disclosures about the reporting entity’s involvement
with variable-interest entities and any significant changes in risk exposure due
to that involvement as well as its effect on the entity’s financial statements.
The provisions of ASU 2009-17 became effective on January 1, 2010 and did not
have a material impact on the Company’s financial position or results of
operations.





Accounting Standards Update No.
2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving
Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded
disclosures related to fair value measurements including (i) the amounts of
significant transfers of assets or liabilities between Levels 1 and 2 of the
fair value hierarchy and the reasons for the transfers, (ii) the reasons for
transfers of assets or liabilities in or out of Level 3 of the fair value
hierarchy, with significant transfers disclosed separately, (iii) the policy for
determining when transfers between levels of the fair value hierarchy are
recognized and (iv) for recurring fair value measurements of assets and
liabilities in Level 3 of the fair value hierarchy, a gross presentation of
information about purchases, sales, issuances and settlements. ASU 2010-06
further clarifies that (i) fair value measurement disclosures should be provided
for each class of assets and liabilities (rather than major category), which
would generally be a subset of assets or liabilities within a line item in the
statement of financial position and (ii) companies should provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for each class of assets and
liabilities included in Levels 2 and 3 of the fair value hierarchy. The
provisions of ASU 2010-06 became effective on January 1, 2010 with the exception
of the requirement to provide Level 3 activity of purchases, sales, issuances
and settlements on a gross basis, which will become effective on January 1,
2011. Early adoption is permitted. The adoption of ASU 2010-06 as of January 1,
2010 did not have a material impact on the Company’s financial position or
results of operations. The adoption of the portion of ASU 2010-06 that becomes
effective on January 1, 2011 is not expected to have a material impact on the
Company’s financial position or results of operations.





Accounting Standards Update No.
2010-09, “Subsequent Events (Topic 855) – Amendments to Certain Recognition and
Disclosure Requirements.” ASU 2010-09 addresses certain implementation
issues related to an entity’s requirement to perform and disclose subsequent
events procedures. ASU 2010-09 added a definition of the term “SEC filer” and
requires SEC filers and certain other entities to evaluate subsequent events
through the date the financial statements are issued. It also exempts SEC filers
from disclosing the date through which subsequent events have been evaluated.
The provisions of ASU 2010-09 became effective upon it’s issuance on February
24, 2010 and did not have a material impact on the Company’s financial position
or results of operations.


62





FIRST M
& F CORPORATION





Accounting Standards Update No.
2010-11, “Derivatives and Hedging (Topic 815) – Scope Exception Related to
Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of
an embedded credit derivative that is exempt from embedded derivative
bifurcation requirements are those that relate to the subordination of one
financial instrument to another. As a result, entities that have contracts
containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative
feature. ASU 2010-11 also allows a one-time election of, on an
instrument-by-instrument basis, the fair value option for any investments in a
beneficial interest in a securitized financial asset, such as certain
investments in collateralized debt obligations, at the beginning of the
reporting period of adoption. The provisions of ASU 2010-11 will become
effective on July 1, 2010 and are not expected to have a material impact on the
Company’s financial position or results of operations.





Accounting Standards Update No.
2010-18, “Receivables (Topic 310) – Effect of a Loan Modification When the Loan
Is Part of a Pool That Is Accounted for as a Single Asset – a consensus of the
FASB Emerging Issues Task Force.” ASU 2010-18 states that a modified loan
within a pool of purchased, credit-impaired loans which are accounted for as a
single asset, should remain in the pool even if the modification would otherwise
be considered a Troubled Debt Restructuring (TDR). A one-time election to
terminate accounting for a group of loans in a pool, which may be made on a
pool-by-pool basis, is allowed upon adoption of ASU 2010-18. ASU 2010-18 does
not require any additional recurring disclosures and will become effective on
July 1, 2010  and is not expected to have a material impact on the
Company’s financial position or results of operations.





Accounting Standards Update No.
2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20
requires entities to provide disclosures designed to facilitate financial
statement users’ evaluation of (i) the nature of credit risk inherent in the
entity’s portfolio of financing receivables, (ii) how that risk is analyzed and
assessed in arriving at the allowance for credit losses and (iii) the changes
and reasons for those changes in the allowance for credit losses. Disclosures
must be disaggregated by portfolio segment, the level at which an entity
develops and documents a systematic method for determining its allowance for
credit losses, and class of financing receivable, which is generally a
disaggregation of portfolio segment. The required disclosures include, among
other things, a rollforward of the allowance for credit losses as well as
information about modified, impaired, non-accrual and past due loans and credit
quality indicators. ASU 2010-20 will be effective for the Company’s financial
statements as of December 31, 2010, as it relates to disclosures required as of
the end of a reporting period. Disclosures that relate to activity during a
reporting period will be required for the Company’s financial statements that
include periods beginning on or after January 1, 2011. The adoption of ASU
2010-20 is not expected to have a material impact on the Company’s financial
position or results of operations.


63





FIRST M
& F CORPORATION





Item
3 - Quantitative and Qualitative Disclosures About Market Risk





Market
risk comes in the form of risk to the net interest income of the Company as well
as to the market values of the financial assets and liabilities on the balance
sheet and the values of off-balance sheet activities such as commitments. The
Company monitors interest rate risk on a monthly basis with quarterly
sensitivity analyses.





Interest
rate shock analysis shows that the Company will experience a 0.25% decrease over
12 months in its net interest income with a gradual (12 month ramp) and
sustained 100 basis point decrease in interest rates. A gradual and sustained
increase in interest rates of 200 basis points will result in a .17% increase in
net interest income.





An
analysis of the change in market value of equity shows how an interest rate
shock will affect the difference between the market value of assets and the
market value of liabilities. With all financial instruments being stated at
market value, the market value of equity will increase by 6.13% with an
immediate and sustained increase in interest rates of 100 basis points. The
market value of equity will decrease by 12.33% with an immediate and sustained
decrease in interest rates of 100 basis points.





The
Company had no hedging instruments in place at September 30, 2010.





Item
4 - Controls and Procedures





As
defined by the Securities and Exchange Commission in Exchange Act Rule
13a-15(e), a company's "disclosure controls and procedures" means controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms.





As of
September 30, 2010, (the "Evaluation Date"), the Company's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures as defined in the Exchange Act
Rules.  Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are sufficiently effective to ensure that material
information relating to the Company and required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. During the last quarter ended September 30, 2010
there has been no change in the Company’s internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.





Subsequent
to the Evaluation Date, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls.


64





FIRST M
& F CORPORATION





PART
II: OTHER INFORMATION





Item
1 - Legal Proceedings





The
Company and its subsidiaries are defendants in various lawsuits arising out of
the normal course of business. In the opinion of management, the ultimate
resolution of these claims should not have a material adverse effect on the
Company’s consolidated financial position or results of operations.





Item
1A – Risk Factors





There
have been no material changes in the risk factors previously disclosed under
Part I - Item 1A of the Company’s 2009 Form 10-K.





Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item
3 – Defaults Upon Senior Securities





None.





Item
4 – (Removed and Reserved)





Item
5 – Other Information





None.


65





FIRST M
& F CORPORATION





Item
6 – Exhibits





3.1
                
                Articles
      of Incorporation of the Registrant.  Incorporated herein by
      reference to (1) Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
      September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.3.2
                
                Articles
      of Amendment of the Registrant. Incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March
      5, 2009.3.3
                
                By-laws
      of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form
      S-1 (File No. 33-08751) September 15, 1986, incorporated herein by
      reference.4.1
                
                Warrant
      to Purchase up to 513,113 Shares of Common Stock of the Registrant.
      Incorporated herein by reference to Exhibit 4.1 to the Registrant’s
      Current Report on Form 8-K, filed on March 5, 2009.10.1
                
                First
      M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the
      Company’s Proxy Statement, March 15, 2005, incorporated herein by
      reference.10.2
                
                Merchants
      and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit
      10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by
      reference.10.3
                
                Letter
      Agreement, including as Exhibit A thereto, Securities Purchase Agreement.
      Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.10.4
                
                Form
      of Preferred Stock Certificate.  Incorporated herein by
      reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
      filed on March 5, 2009.10.5
                
                Side
      Letter Agreement.  Incorporated herein by reference to Exhibit
      10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.11
                
                Computation
      of Earnings Per Share – Filed herewith as Note 13 to the consolidated
      financial statements.31
                
                Rule
      13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and
      Rule 13a-14(a) Certification of John G. Copeland, Chief Financial
      Officer.32
                
                Section
      1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and
      Section 1350 Certification of John G. Copeland, Chief Financial
      Officer.


66





FIRST M
& F CORPORATION





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





FIRST M
& F CORPORATION





Date :
November 15, 2010





BY:
                  /s/ Hugh S. Potts, Jr.
                  
                  BY:
                  /s/ John G. CopelandHugh
      S. Potts, Jr.
                  
                  
                  John
      G. CopelandChairman
      of the Board and
                  
                  
                  Executive
      Vice President andChief
      Executive Officer
                  
                  
                  Chief
      Financial Officer(principal
      executive officer)
                  
                  
                  (principal
      financial officer)BY:
                  /s/ Robert C. Thompson,
  IIIRobert
      C. Thompson, IIIVice
      President – Accounting Policy(principal
      accounting
officer)


67





FIRST M
& F CORPORATION





EXHIBIT
INDEX





3.1
                
                Articles
      of Incorporation of the Registrant.  Incorporated herein by
      reference to (1) Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
      September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.3.2
                
                Articles
      of Amendment of the Registrant. Incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March
      5, 2009.3.3
                
                By-laws
      of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form
      S-1 (File No. 33-08751) September 15, 1986, incorporated herein by
      reference.4.1
                
                Warrant
      to Purchase up to 513,113 Shares of Common Stock of the Registrant.
      Incorporated herein by reference to Exhibit 4.1 to the Registrant’s
      Current Report on Form 8-K, filed on March 5, 2009.10.1
                
                First
      M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the
      Company’s Proxy Statement, March 15, 2005, incorporated herein by
      reference.10.2
                
                Merchants
      and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit
      10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by
      reference.10.3
                
                Letter
      Agreement, including as Exhibit A thereto, Securities Purchase Agreement.
      Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.10.4
                
                Form
      of Preferred Stock Certificate.  Incorporated herein by
      reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
      filed on March 5, 2009.10.5
                
                Side
      Letter Agreement.  Incorporated herein by reference to Exhibit
      10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.11
                
                Computation
      of Earnings Per Share – Filed herewith as Note 13 to the consolidated
      financial statements.31
                
                Rule
      13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and
      Rule 13a-14(a) Certification of John G. Copeland, Chief Financial
      Officer.32
                
                Section
      1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and
      Section 1350 Certification of John G. Copeland, Chief Financial
      Officer.




68