UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**





**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**


For
      the
      quarterly period ended September 30, 2008


Or





**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF**


**THE
      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.
xYes  oNo





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.


Large accelerated filer o
            
            Accelerated filer
                xNon-accelerated filer o
            (Do not check if a smaller reporting
            Smaller reporting company ocompany)





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


o
      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
            
            9,176,596
                SharesTitle
                of Class
            
            Shares
                Outstanding at October 31, 2008








**FIRST
      M & F CORPORATION**





**FORM
      10-Q**





**INDEX**





**Page****PART
                1:**
            **FINANCIAL
                INFORMATION**Item
                1
            Financial
                Statements (unaudited):
            
            3Consolidated
                Statements of Condition
            
            3Consolidated
                Statements of Income
            
            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
            
            16Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            38Item
                4
            Controls
                and Procedures
            
            38**PART
                II:**
            **OTHER
                INFORMATION**Item
                1
            Legal
                Proceedings
            
            39Item
                1A
            Risk
                Factors
            
            39Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            39Item
                3
            Defaults
                upon Senior Securities
            
            39Item
                4
            Submission
                of Matters to a Vote of Security Holders
            
            39Item
                5
            Other
                Information
            
            39Item
                6
            Exhibits
            
            39SIGNATURES
            
            40EXHIBIT
                INDEXCERTIFICATIONS




2





FIRST
      M
& F CORPORATION AND SUBSIDIARY





**PART
      I: FINANCIAL INFORMATION**


**Item
      1 – Financial Statements (Unaudited)**





Consolidated
      Statements of Condition


(Unaudited)


*(Dollars
                in thousands)*September 30
            
            December 312008
            
            2007
            
            2007AssetsCash
                and due from banks
            
            $
            41,791
            
            $
            46,352
            
            $
            54,240Interest
                bearing bank balances
            
            
            10,721
            
            
            2,774
            
            
            3,480Federal
                funds sold
            
            
            31,000
            
            
            -
            
            
            2,000Securities
                available for sale, amortized cost of $220,477, $237,484 and
                $236,575
            
            
            219,953
            
            
            236,888
            
            
            237,138Loans
                held for sale
            
            
            5,466
            
            
            6,834
            
            
            5,571Loans,
                net of unearned income
            
            
            1,206,213
            
            
            1,198,460
            
            
            1,219,435Allowance
                for loan losses
            
            
            (19,618
            )
            
            (14,941
            )
            
            (14,217
            )Net
                loans
            
            
            1,186,595
            
            
            1,183,519
            
            
            1,205,218Bank
                premises and equipment
            
            
            44,739
            
            
            44,845
            
            
            45,545Accrued
                interest receivable
            
            
            10,099
            
            
            11,919
            
            
            12,434Other
                real estate
            
            
            7,191
            
            
            4,926
            
            
            6,232Goodwill
            
            
            32,572
            
            
            32,572
            
            
            32,572Other
                intangible assets
            
            
            7,248
            
            
            7,687
            
            
            7,612Bank
                owned life insurance
            
            
            20,372
            
            
            19,640
            
            
            19,829Other
                assets
            
            
            23,518
            
            
            25,726
            
            
            21,880$
            1,641,265
            
            $
            1,623,682
            
            $
            1,653,751Liabilities
                and Stockholders’ EquityLiabilities:Noninterest-bearing
                deposits
            
            $
            178,980
            
            $
            186,123
            
            $
            191,206Interest-bearing
                deposits
            
            
            1,072,483
            
            
            1,028,983
            
            
            1,071,249Total
                deposits
            
            
            1,251,463
            
            
            1,215,106
            
            
            1,262,455Federal
                funds purchased and repurchase agreements
            
            
            11,938
            
            
            29,264
            
            
            9,676Other
                borrowings
            
            
            197,547
            
            
            201,217
            
            
            201,312Junior
                subordinated debt
            
            
            30,928
            
            
            30,928
            
            
            30,928Accrued
                interest payable
            
            
            3,577
            
            
            4,718
            
            
            5,151Other
                liabilities
            
            
            4,896
            
            
            5,933
            
            
            4,131Total
                liabilities
            
            
            1,500,349
            
            
            1,487,166
            
            
            1,513,653Noncontrolling
                interest in subsidiaries
            
            
            18
            
            
            18
            
            
            18Stockholders’
                equity:Preferred
                stock:Class
                A; 1,000,000 shares authorized
            
            
            -
            
            
            -
            
            
            -Class
                B; 1,000,000 shares authorized
            
            
            -
            
            
            -
            
            
            -Common
                stock of $5.00 par value; 15,000,000 shares authorized: 9,061,846,
                9,066,080 and 9,067,580 shares issued
            
            
            45,309
            
            
            45,330
            
            
            45,338Additional
                paid-in capital
            
            
            30,421
            
            
            30,448
            
            
            30,475Nonvested
                restricted stock awards
            
            
            789
            
            
            590
            
            
            643Retained
                earnings
            
            
            65,700
            
            
            62,027
            
            
            64,395Accumulated
                other comprehensive income (loss)
            
            
            (1,321
            )
            
            (1,897
            )
            
            (771
            )Total
                stockholders’ equity
            
            
            140,898
            
            
            136,498
            
            
            140,080$
            1,641,265
            
            $
            1,623,682
            
            $
            1,653,751





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


3





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Consolidated
      Statements of Income


(Unaudited)





*(Dollars in thousands, except per share data)*
            
            Three Months Ended
            
            Nine Months EndedSeptember 30
            
            September 302008
            
            2007
            
            2008
            
            2007Interest
                income:Interest
                and fees on loans
            
            $
            19,675
            
            $
            23,091
            
            $
            62,160
            
            $
            66,375Interest
                on loans held for sale
            
            
            46
            
            
            105
            
            
            241
            
            
            353Taxable
                investments
            
            
            2,179
            
            
            2,303
            
            
            6,893
            
            
            7,154Tax-exempt
                investments
            
            
            554
            
            
            431
            
            
            1,607
            
            
            1,340Federal
                funds sold
            
            
            10
            
            
            35
            
            
            144
            
            
            103Interest
                bearing bank balances
            
            
            15
            
            
            80
            
            
            120
            
            
            177Total
                interest income
            
            
            22,479
            
            
            26,045
            
            
            71,165
            
            
            75,502Interest
                expense:Deposits
            
            
            7,266
            
            
            9,440
            
            
            25,136
            
            
            26,959Federal
                funds purchased and repurchase agreements
            
            
            98
            
            
            127
            
            
            259
            
            
            464Other
                borrowings
            
            
            1,596
            
            
            2,193
            
            
            5,035
            
            
            6,277Junior
                subordinated debt
            
            
            499
            
            
            499
            
            
            1,488
            
            
            1,487Total
                interest expense
            
            
            9,459
            
            
            12,259
            
            
            31,918
            
            
            35,187Net
                interest income
            
            
            13,020
            
            
            13,786
            
            
            39,247
            
            
            40,315Provision
                for loan losses
            
            
            2,190
            
            
            630
            
            
            9,050
            
            
            1,890Net
                interest income afterprovision
                for loan losses
            
            
            10,830
            
            
            13,156
            
            
            30,197
            
            
            38,425Noninterest
                income:Service
                charges on deposit accounts
            
            
            3,042
            
            
            2,777
            
            
            8,765
            
            
            7,974Mortgage
                banking income
            
            
            389
            
            
            372
            
            
            1,014
            
            
            1,146Agency
                commission income
            
            
            1,153
            
            
            1,119
            
            
            3,191
            
            
            3,168Trust
                and brokerage income
            
            
            117
            
            
            157
            
            
            453
            
            
            444Bank
                owned life insurance income
            
            
            139
            
            
            170
            
            
            487
            
            
            524Securities
                gains (losses), net
            
            
            (17
            )
            
            -
            
            
            5
            
            
            -Loss
                on extinguishment of debt
            
            
            -
            
            
            -
            
            
            -
            
            
            (126
            )Other
                income
            
            
            694
            
            
            835
            
            
            2,384
            
            
            2,917Total
                noninterest income
            
            
            5,517
            
            
            5,430
            
            
            16,299
            
            
            16,047Noninterest
                expenses:Salaries
                and employee benefits
            
            
            7,230
            
            
            7,302
            
            
            22,193
            
            
            21,856Net
                occupancy expenses
            
            
            1,084
            
            
            998
            
            
            3,115
            
            
            2,767Equipment
                expenses
            
            
            882
            
            
            884
            
            
            2,671
            
            
            2,699Software
                and processing expenses
            
            
            518
            
            
            385
            
            
            1,475
            
            
            1,089Telecommunication
                expenses
            
            
            317
            
            
            291
            
            
            865
            
            
            822Marketing
                and business development expenses
            
            
            381
            
            
            436
            
            
            1,050
            
            
            1,201Intangible
                asset amortization
            
            
            121
            
            
            120
            
            
            364
            
            
            426Other
                expenses
            
            
            2,696
            
            
            2,478
            
            
            8,310
            
            
            7,424Total
                noninterest expenses
            
            
            13,229
            
            
            12,894
            
            
            40,043
            
            
            38,284Income
                before income taxes andnoncontrolling
                interests
            
            
            3,118
            
            
            5,692
            
            
            6,453
            
            
            16,188Income
                taxes
            
            
            904
            
            
            1,879
            
            
            1,561
            
            
            5,272Noncontrolling
                interest in earnings of subsidiaries,net
                of taxes of $2, $3, $5 and $12
            
            
            4
            
            
            5
            
            
            9
            
            
            19Net
                income
            
            $
            2,210
            
            $
            3,808
            
            $
            4,883
            
            $
            10,897Earnings
                per share:Basic
            
            $
            .24
            
            $
            .42
            
            $
            .54
            
            $
            1.20Diluted
            
            $
            .24
            
            $
            .42
            
            $
            .53
            
            $
            1.20





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


4





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Consolidated
      Statements of Comprehensive Income


(Unaudited)





*(Dollars in thousands)*
            
            Three Months Ended
            
            Nine Months EndedSeptember 30
            
            September 302008
            
            2007
            
            2008
            
            2007Net
                income
            
            $
            2,210
            
            $
            3,808
            
            $
            4,883
            
            $
            10,897Other
                comprehensive income:Change
                in unrealized gains (losses) on securities available for sale, net
                of tax
                of $223 and $629 for the three months ended September 30 and $403
                and $304
                for the nine months ended September 30
            
            
            372
            
            
            1,057
            
            
            (679
            )
            
            510Reclassification
                adjustment for (gains) losses on securities available for sale included
                in
                net income, net of tax of $6 and $0 for the three months ended September
                30 and $2 and $0 for the nine months ended September 30
            
            
            11
            
            
            -
            
            
            (3
            )
            
            -Defined
                benefit pension plan:Transition
                obligation amortization, net of tax of $1 and$1
                for the three months ended September 30 and $3 and$3
                for the nine months ended September 30
            
            
            (1
            )
            
            (1
            )
            
            (4
            )
            
            (4
            )Prior
                service cost amortization, net of tax of $3 and $4for
                the three months ended September 30 and $10 and$11
                for the nine months ended September 30
            
            
            (5
            )
            
            (5
            )
            
            (17
            )
            
            (17
            )Actuarial
                loss amortization, net of tax of $30 and $40 forthe
                three months ended September 30 and $91 and $118for
                the nine months ended September 30
            
            
            50
            
            
            64
            
            
            153
            
            
            195Other
                comprehensive income (loss)
            
            
            427
            
            
            1,115
            
            
            (550
            )
            
            684Total
                comprehensive income
            
            $
            2,637
            
            $
            4,923
            
            $
            4,333
            
            $
            11,581





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, 2008 and 2007


(Unaudited)





*(Dollars
                in thousands, except per share data)*
            
            
            
            Nonvested
            
            
            
            AccumulatedAdditional
            
            Restricted
            
            
            
            OtherCommon
            
            Paid-in
            
            Stock
            
            Retained
            
            ComprehensiveStock
            
            Capital
            
            Awards
            
            Earnings
            
            Income
                (Loss)
            
            TotalJanuary
                1, 2007
            
            $
            45,231
            
            $
            30,315
            
            $
            375
            
            $
            54,707
            
            $
            (2,581
            )
            $
            128,047Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            10,897
            
            
            -
            
            
            10,897Cash
                dividends ($.39 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,579
            )
            
            -
            
            
            (3,579
            )19,854
                common shares issuedin
                exercise of stock options
            
            
            99
            
            
            206
            
            
            -
            
            
            -
            
            
            -
            
            
            305Tax
                benefits on stock optiontransactions
            
            
            -
            
            
            87
            
            
            -
            
            
            -
            
            
            -
            
            
            87Option
                cancellation payments
            
            
            -
            
            
            (175
            )
            
            -
            
            
            -
            
            
            -
            
            
            (175
            )Share-based
                compensationexpense
                recognized
            
            
            -
            
            
            15
            
            
            215
            
            
            2
            
            
            -
            
            
            232Net
                change
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            684
            
            
            684September
                30, 2007
            
            $
            45,330
            
            $
            30,448
            
            $
            590
            
            $
            62,027
            
            $
            (1,897
            )
            $
            136,498January
                1, 2008
            
            $
            45,338
            
            $
            30,475
            
            $
            643
            
            $
            64,395
            
            $
            (771
            )
            $
            140,080Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,883
            
            
            -
            
            
            4,883Cash
                dividends ($.39 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,580
            )
            
            -
            
            
            (3,580
            )7,500
                common shares repurchased
            
            
            (38
            )
            
            (80
            )
            
            -
            
            
            -
            
            
            -
            
            
            (118
            )1,500
                restricted share awardsvested
            
            
            9
            
            
            21
            
            
            (30
            )
            
            -
            
            
            -
            
            
            -Share-based
                compensationexpense
                recognized
            
            
            -
            
            
            5
            
            
            176
            
            
            2
            
            
            -
            
            
            183Net
                change
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (550
            )
            
            (550
            )September
                30, 2008
            
            $
            45,309
            
            $
            30,421
            
            $
            789
            
            $
            65,700
            
            $
            (1,321
            )
            $
            140,898





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 302008
            
            2007Cash
                flows from operating activities:Net
                income
            
            $
            4,883
            
            $
            10,897Adjustments
                to reconcile net income to net cash provided by operating
                activities:Share-based
                compensation
            
            
            183
            
            
            232Amortization
                of pension costs
            
            
            90
            
            
            210Depreciation
                and amortization
            
            
            2,545
            
            
            2,393Provision
                for loan losses
            
            
            9,050
            
            
            1,890Net
                investment accretion
            
            
            (125
            )
            
            (277
            )Net
                change in unearned fees/deferred costs on loans
            
            
            (405
            )
            
            133Capitalized
                dividends on FHLB stock
            
            
            (204
            )
            
            (278
            )Net
                accretion of discount on time deposits
            
            
            33
            
            
            58Net
                accretion of discount on debt
            
            
            2
            
            
            3Loss
                on extinguishment of debt
            
            
            -
            
            
            126Gain
                on securities available for sale
            
            
            (5
            )
            
            -Gain
                on loans held for sale
            
            
            (208
            )
            
            (286
            )Other
                asset sales losses
            
            
            555
            
            
            202Earnings
                of noncontrolling interest
            
            
            15
            
            
            30Deferred
                income taxes
            
            
            (2,534
            )
            
            21(Increase)
                decrease in:Accrued
                interest receivable
            
            
            2,335
            
            
            671Cash
                surrender value of bank owned life insurance
            
            
            (487
            )
            
            (524
            )Loans
                held for sale
            
            
            317
            
            
            713Other
                assets
            
            
            (23
            )
            
            (6,125
            )Increase
                (decrease) in:Accrued
                interest payable
            
            
            (1,574
            )
            
            (66
            )Other
                liabilities
            
            
            1,997
            
            
            1,455Net
                cash provided by operating activities
            
            
            16,440
            
            
            11,478Cash
                flows from investing activities:Purchases
                of securities available for sale
            
            
            (74,988
            )
            
            (22,538
            )Sales
                of securities available for sale
            
            
            5,858
            
            
            477Maturities
                of securities available for sale
            
            
            85,358
            
            
            48,092Net
                (increase) decrease in:Interest
                bearing bank balances
            
            
            (7,241
            )
            
            916Federal
                funds sold
            
            
            (29,000
            )
            
            -Loans
            
            
            2,579
            
            
            (116,676
            )Bank
                premises and equipment
            
            
            (1,352
            )
            
            (5,656
            )Purchases
                of bank owned life insurance
            
            
            (56
            )
            
            (34
            )Proceeds
                from sales of other real estate and other repossessed
                assets
            
            
            5,809
            
            
            1,461Net
                (purchases) redemptions, of FHLB stock
            
            
            387
            
            
            (974
            )Net
                cash used in investing activities
            
            
            (12,646
            )
            
            (94,932
            )





(Continued)


7





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Consolidated
      Statements of Cash Flows


(Unaudited)





*(Dollars in thousands)*
            
            Nine Months Ended September 302008
            
            2007Cash
                flows from financing activities:Net
                increase (decrease) in deposits
            
            $
            (11,025
            )
            $
            29,066Net
                increase in short-term borrowings
            
            
            2,262
            
            
            9,652Proceeds
                from other borrowings
            
            
            200,500
            
            
            385,600Repayments
                of other borrowings
            
            
            (204,267
            )
            
            (350,912
            )Earnings
                distributions to noncontrolling interests
            
            
            (15
            )
            
            (31
            )Cash
                dividends
            
            
            (3,580
            )
            
            (3,579
            )Common
                shares issued
            
            
            -
            
            
            305Common
                shares repurchased
            
            
            (118
            )
            
            -Payments
                to cancel stock options
            
            
            -
            
            
            (175
            )Tax
                benefits on stock option transactions
            
            
            -
            
            
            87Net
                cash provided by (used in) financing activities
            
            
            (16,243
            )
            
            70,013Net
                decrease in cash and due from banks
            
            
            (12,449
            )
            
            (13,441
            )Cash
                and due from banks at January 1
            
            
            54,240
            
            
            59,793Cash
                and due from banks at September 30
            
            $
            41,791
            
            $
            46,352Total
                interest paid
            
            $
            33,463
            
            $
            35,189Total
                income taxes paid
            
            
            2,859
            
            
            5,956Income
                tax refunds received
            
            
            -
            
            
            302Transfers
                of loans to foreclosed property
            
            
            7,124
            
            
            3,361




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, 2007, 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 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 51% ownership
      in Merchants Financial Services, LLC, an accounts receivable financing business,
      and the Bank’s 55% ownership in MS Statewide Title, LLC, a title insurance
      agency. Certain reclassifications have been made to the 2007 financial
      statements to be consistent with the 2008 presentation. 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, 2007.
      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.





Note
      2: Fair Value





Effective
      January 1, 2008, the Company adopted the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” for financial
      assets and liabilities. SFAS No. 157 defines fair value 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. SFAS No. 157
      establishes 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. 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





The
      application of SFAS 157 in situations where the market for a financial asset
      is
      not active was clarified by the issuance of FSP No. SFAS 157-3, “Determining the
      Fair Value of a Financial Asset When the Market for That Asset Is Not Active,”
in October 2008. FSP No. SFAS 157-3 is effective for financial
      statements issued as of September 30, 2008 and thereafter. FSP No. SFAS 157-3
      did not have a material impact on the methods by which the Company determines
      the fair values of its financial assets.


9





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Notes
      to
      Consolidated Financial Statements


(Unaudited)





Note
      2: (Continued)





The
      following table summarizes financial assets and financial liabilities measured
      at fair value on a recurring basis as of September 30, 2008, segregated by
      the
      level of the valuation inputs within the fair value hierarchy utilized to
      measure fair value:





Fair Value Measurements atSeptember 30, 2008, UsingQuotedPrices
                InActiveMarkets
            
            SignificantAssets/Liabilities
            
            For
            
            Other
            
            SignificantMeasured at Fair
            
            Identical
            
            Observable
            
            UnobservableValue
            
            Assets
            
            Inputs
            
            Inputs*(Dollars in thousands)*
            
            September 30, 2008
            
            (Level 1)
            
            (Level 2)
            
            (Level 3)Securities
                available for sale
            
            $
            219,953
            
            $
            -
            
            $
            219,953
            
            $
            -Mortgage
                derivative assets
            
            
            78
            
            
            -
            
            
            78
            
            
            -Mortgage
                derivative liabilities
            
            
            16
            
            
            -
            
            
            16
            
            
            -





*Securities
      Available for Sale* .
      Securities classified as available for sale are reported at fair value utilizing
      Level 2 inputs. For these securities, the Corporation obtains fair value
      measurements from an independent pricing service. The fair value measurements
      consider observable data that may include dealer quotes, market spreads, cash
      flows, market yield curves, prepayment speeds, credit information (including
      observable default rates) and the instrument’s contractual terms and conditions,
      among other things.





*Mortgage
      Derivatives* .
      Mortgage derivative assets and liabilities are reported at fair value utilizing
      Level 2 inputs. These assets and liabilities represent the fair values of the
      commitments of the Company to originate mortgages at certain rates as well
      as
      the commitments of investors to purchase the mortgages 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, projected
      cash flows, yield curves and credit-related adjustments.





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 of 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 are valued for impairment purposes by using the
      appraised amount of the underlying collateral. Although the valuations based
      upon non-market discount rates and collateral values do not meet the technical
      definition of “fair value” they are similar in nature. The Company recorded an
      additional $5.000 million loan loss accrual during June 2008 and an additional
      $750 thousand loan loss accrual during September 2008 based primarily upon
      impairment calculations related to collateral dependent loans.





Loans
      held for sale, primarily mortgage and student loans, are reported at the lower
      of cost or fair value calculated at the individual loan level. Therefore,
      although fair values for these instruments are measured on a recurring basis,
      the loans may be reported at their amortized cost if it is lower than the loan’s
      fair value. Fair value is determined primarily using a market yield
      curve.





Certain
      non-financial assets and non-financial liabilities measured at fair value on
      a
      non-recurring basis include non-financial assets and non-financial liabilities
      related to reporting units measured at fair value in the testing of goodwill
      impairment, as well as intangible assets and other non-financial long-lived
      assets measured at fair value for impairment assessment. SFAS No. 157 will
      be
      applicable to these fair value measurements beginning January 1,
      2009.


10





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Notes
      to
      Consolidated Financial Statements


(Unaudited)





Note
      3: Earnings Per Share





*(Dollars
                in thousands, except per share data)*
            
            Three Months Ended September 30
            
            Nine Months Ended September 302008
            
            2007
            
            2008
            
            2007Net
                income
            
            $
            2,210
            
            $
            3,808
            
            $
            4,883
            
            $
            10,897Weighted
                average shares outstanding
            
            
            9,060,675
            
            
            9,063,689
            
            
            9,061,685
            
            
            9,058,128Add
                dilutive effect of outstanding options
            
            
            22,848
            
            
            53,483
            
            
            30,432
            
            
            52,467Adjusted
                dilutive shares outstanding
            
            
            9,083,523
            
            
            9,117,172
            
            
            9,092,117
            
            
            9,110,595Earnings
                per share:Basic
            
            $
            .24
            
            $
            .42
            
            $
            .54
            
            $
            1.20Diluted
            
            $
            .24
            
            $
            .42
            
            
            .53
            
            
            1.20Stock
                options not included in adjustedshares
                due to anti-dilutive effect
            
            
            22,847
            
            
            1,474
            
            
            33,647
            
            
            1,394





Note
      4: Loans





The
      composition of the loan portfolio is shown in the table below:





*(Dollars
                in thousands)*
            
            September 30
            
            December 312008
            
            2007
            
            2007Commercial,
                financial and agricultural
            
            $
            145,743
            
            $
            164,866
            
            $
            169,447Non-residential
                real estate
            
            
            759,279
            
            
            713,619
            
            
            731,595Residential
                real estate
            
            
            208,718
            
            
            221,915
            
            
            223,614Home
                equity loans
            
            
            46,201
            
            
            44,964
            
            
            45,987Consumer
                loans
            
            
            38,001
            
            
            40,374
            
            
            40,860Other
                loans
            
            
            8,271
            
            
            12,722
            
            
            7,932Total
                loans
            
            $
            1,206,213
            
            $
            1,198,460
            
            $
            1,219,435





The
      following table is a summary of the activity in the Allowance for Loan Losses
      for the first nine months of 2008 and 2007:





*(Dollars in thousands)*
            
            Nine Months Ended September 302008
            
            2007Balance
                at January 1
            
            $
            14,217
            
            $
            14,950Loans
                charged off
            
            
            (4,205
            )
            
            (2,839
            )Recoveries
            
            
            556
            
            
            940Net
                charge-offs
            
            
            (3,649
            )
            
            (1,899
            )Provision
                for loan losses
            
            
            9,050
            
            
            1,890Balance
                at September 30
            
            $
            19,618
            
            $
            14,941


11





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, 2006
            
            $
            32,572
            
            $
            6,784
            
            $
            209
            
            $
            95
            
            $
            1,025Amortization
                expense
            
            
            -
            
            
            (385
            )
            
            (20
            )
            
            (21
            )
            
            -Balance
                at September 30, 2007
            
            $
            32,572
            
            $
            6,399
            
            $
            189
            
            $
            74
            
            $
            1,025Balance
                at December 31, 2007
            
            $
            32,572
            
            $
            6,292
            
            $
            228
            
            $
            67
            
            $
            1,025Amortization
                expense
            
            
            -
            
            
            (320
            )
            
            (23
            )
            
            (21
            )
            
            -Balance
                at September 30, 2008
            
            $
            32,572
            
            $
            5,972
            
            $
            205
            
            $
            46
            
            $
            1,025Estimated
                amortization expenseRemainder
                of 2008
            
            
            
            
            $
            107
            
            $
            8
            
            $
            62009
            
            
            
            
            
            427
            
            
            30
            
            
            262010
            
            
            
            
            
            427
            
            
            30
            
            
            142011
            
            
            
            
            
            427
            
            
            30
            
            
            -2012
            
            
            
            
            
            427
            
            
            24
            
            
            -2013
            
            
            
            
            
            427
            
            
            21
            
            
            -





The
      Company acquired the book of business of an insurance agency in Kosciusko,
      Mississippi in October 2007, for $46 thousand. The $46 thousand was attributed
      to renewal list intangible assets with an estimated life of 15
      years.





The
      banking charter is being accounted for as an indefinite-lived intangible asset
      and is therefore 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.





Goodwill
      is tested for impairment annually as of the end of the fiscal year. The
      impairment testing as of December 31, 2007 showed no impairment. Subsequent
      recalculations of the annual test at the end of the second and third quarters
      using a more severe credit deterioration assumption also resulted in no
      impairment charges.





Note
      6: Variable Interest Entity And Borrowing Arrangements





The
      following is a summary of other borrowings at September 30, 2008 and 2007 and
      December 31, 2007:





*(Dollars
                in thousands)*
            
            September 30
            
            December 312008
            
            2007
            
            2007Company’s
                line of credit in the amount of $15,000,000, maturing in May 2009;
                secured
                by approximately 29% of the Bank’s common stock; interest payable
                quarterly at .75% below the lender’s base rate
            
            $
            2,416
            
            $
            1,667
            
            $
            1,917Bank’s
                advances from Federal Home Loan Banks, net of unamortized purchase
                accounting discounts of $2, $2 and $5
            
            
            195,048
            
            
            199,550
            
            
            199,084Other
                mortgages to third parties on other real estate
            
            
            83
            
            
            -
            
            
            311$
            197,547
            
            $
            201,217
            
            $
            201,312Company’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


12





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Notes
      to
      Consolidated Financial Statements


(Unaudited)




Note
      6: (Continued)





The
      net
      loss for the second quarter of 2008 caused the Company to be in violation of
      a
      covenant related to a minimum quarterly return on assets percentage in its
      note
      with a correspondent bank. The correspondent bank granted a temporary waiver
      to
      the covenant violation. Third quarter earnings and the third quarter increase
      in
      non-performing loans caused the company to continue to be in violation of the
      return on assets covenant and additionally to be in violation of a Loan Loss
      Allowance covenant requiring 100% coverage of non-performing loans. The
      correspondent bank has granted a temporary waiver of these covenant
      violations.





The
      Bank
      has advances from the Federal Home Loan Bank of Dallas (FHLB) under Blanket
      Agreements for Advances and Security Agreements. These agreements allow the
      Bank
      to borrow funds from the FHLB to fund mortgage loan programs and to satisfy
      certain other funding needs. The value of mortgage-backed securities and
      mortgage loans pledged under these agreements must be maintained at not less
      than 115% and 150%, respectively, of the advances outstanding.





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 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.





Note
      7: Pension and Other Employee Benefit Plans





As
      discussed in Note 18 to the December 31, 2007 financial statements, the Bank
      has
      a defined benefit pension plan covering substantially all full time employees
      of
      the Bank and its subsidiaries. The Company adopted Statement of Financial
      Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension
      and Other Postretirement Plans” as of December 31, 2006. The following table
      provides a summary of the components of the Unamortized Pension Costs recognized
      in stockholders’ equity as of September 30, 2008 and December 31,
      2007:





*(Dollars
                in thousands)*
            
            Balance
            
            2008
            
            Balance12/31/07
            
            Amortization
            
            09/30/08Unamortized
                transition asset
            
            $
            (18
            )
            $
            7
            
            $
            (11
            )Unamortized
                prior service cost
            
            
            (145
            )
            
            28
            
            
            (117
            )Unamortized
                actuarial loss
            
            
            1,955
            
            
            (245
            )
            
            1,7101,792
            
            
            (210
            )
            
            1,582Deferred
                taxes
            
            
            (668
            )
            
            78
            
            
            (590
            )Net
                unamortized pension costs
            
            $
            1,124
            
            $
            (132
            )
            $
            992





The
      following is a summary of the components of net periodic benefit costs for
      the
      three and nine month periods ended September 30, 2008 and 2007:





*(Dollars
                in thousands)*
            
            Three Months Ended September 30
            
            Nine Months Ended September 302008
            
            2007
            
            2008
            
            2007Service
                cost
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Interest
                cost
            
            
            115
            
            
            118
            
            
            345
            
            
            355Expected
                return on plan assets
            
            
            (155
            )
            
            (141
            )
            
            (465
            )
            
            (423
            )Amortization
                of transition asset
            
            
            (2
            )
            
            (2
            )
            
            (7
            )
            
            (7
            )Amortization
                of prior service costs
            
            
            (9
            )
            
            (9
            )
            
            (28
            )
            
            (28
            )Recognized
                actuarial (gain) loss
            
            
            81
            
            
            104
            
            
            245
            
            
            313Net
                pension cost
            
            $
            30
            
            $
            70
            
            $
            90
            
            $
            210





The
      Company did not make any contributions to the pension plan during the first
      nine
      months of 2008. The Company made a $400 thousand contribution to the pension
      plan during the third quarter of 2007. The Company does not expect to make
      any
      contributions to the pension plan during 2008.





The
      Company made $75 thousand in contributions to the ESOP and $520 thousand in
      matching contributions to the 401k plan during the first nine months of 2008.
      The Company made $75 thousand in contributions to the ESOP and $528 thousand
      in
      matching contributions to the 401k plan during the first nine months of
      2007.


13





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Notes
      to
      Consolidated Financial Statements


(Unaudited)





Note
      7: (Continued)





The
      Company has a nonqualified deferred compensation plan for certain senior
      officers. Participants deferred $75 thousand of compensation and
      received


$31
      thousand in distributions during the first nine months of 2008. Participants
      deferred $75 thousand of compensation and received $5 thousand in distributions
      during the first nine months of 2007. Employee benefit expenses include credits
      for earnings declines attributed to the participants’ accounts of $34 thousand
      for the first nine months of 2008 and charges for earnings increases of $48
      thousand for the first nine months of 2007. The plan incurred $2 thousand of
      expenses during the first nine months of 2008 and $4 thousand during the first
      nine months of 2007. Liabilities of the plan were $443 thousand at September
      30,
      2008, and $396 thousand at September 30, 2007, substantially all of which were
      vested.





Note
      8: Share-based Compensation





The
      Company adopted Statement of Financial Accounting Standards (SFAS) No. 123
      (revised 2004), “Share-Based Payment”, as of July 1, 2005. SFAS No. 123R
      requires the use of the fair value method of accounting for stock-based
      compensation. The Company adopted the modified prospective method of transition
      whereby stock-based compensation expense is recognized prospectively for all
      stock-based awards that were not fully vested as of the date of adoption of
      the
      Statement, and for all awards issued thereafter.





Through
      June 30, 2005 the Company accounted for its stock-based employee compensation
      plans based on the “intrinsic value method” provided in Accounting Principles
      Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees”, and
      related interpretations. Because the exercise price of the Company’s employee
      stock options equals the market price of the underlying stock on the date of
      grant, no compensation expense was recognized on option plans.





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 outstanding options and weighted average
      exercise prices:





Nine
                Months Ended September 302008
            
            2007Number
            
            Price
            
            Number
            
            PriceJanuary
                1
            
            
            128,500
            
            $
            16.16
            
            
            186,462
            
            $
            15.59Exercised
            
            
            -
            
            
            -
            
            
            (19,854
            )
            
            15.37Cancelled
            
            
            -
            
            
            -
            
            
            (38,108
            )
            
            13.96Granted
            
            
            7,000
            
            
            13.84
            
            
            2,000
            
            
            19.00September
                30
            
            
            135,500
            
            $
            16.04
            
            
            130,500
            
            $
            16.16Exercisable
                at September 30, 2008
            
            
            118,500
            
            $
            15.80Available
                for additional grant at September 30, 2008
            
            
            388,000





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
      that
      are recognized beginning with the third quarter of 2005 and
      prospectively.





Management,
      with authorization from the Board of Directors, negotiated a payment with three
      option holders to cancel 38,108 in-the-money options that were set to expire
      in
      March 2007. The values of the options at the times of the transactions were
      more
      than the amounts paid, thereby requiring no compensation expense to be
      recognized. The total amount paid to cancel the options was $175
      thousand.


14





FIRST
      M
& F CORPORATION AND SUBSIDIARY





Notes
      to
      Consolidated Financial Statements


(Unaudited)





Note
      8: (Continued)





In
      August
      2005 the Company issued 76,766 restricted stock awards at a grant date fair
      value of $17.08 to certain senior officers of the Company. Substantially all
      of
      the shares vest in seven (7) years and are potentially forfeitable until the
      vesting date. Additionally the 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 seven
      (7)
      year vesting period would not prevent vesting of the shares. In December 2005
      the Company issued 37,000 restricted stock awards at a grant date fair value
      of
      $16.86 to certain senior and executive officers of the Bank. The shares vest
      on
      the following schedule: 25,000 of the shares in seven (7) years, 6,000 shares
      in
      five (5) years and 6,000 shares in three (3) years. In December 2006 the Company
      issued 4,000 restricted stock awards at a grant date fair value of $19.59 to
      an
      officer of the Bank. The shares vest as follows: 1,500 shares in one year,
      1,500
      shares in two years and 1,000 shares in three years. In December 2007 the
      Company issued 13,250 restricted stock awards at a grant date fair value of
      $15.48 to certain officers of the Bank and its subsidiary. The shares vest
      in
      seven (7) years. The share awards issued in December of 2005, 2006 and 2007
      have
      the same potential acceleration criteria as the awards issued in August 2005.
      At
      September 30, 2008 there was $1.104 million in unrecognized compensation cost.
      The Company estimates that 4.00% (.57% annual rate) of the nonvested shares
      will
      be forfeited in determining net compensation expenses recognized. In March
      2007,
      3,000 shares were forfeited, and in December 2007, an additional 3,000 shares
      were forfeited. In December 2007, 1,500 shares of restricted stock with a fair
      value of $24 thousand became fully vested and outstanding. In April 2008, 4,000
      shares were forfeited, and in May 2008, an additional 3,000 shares were
      forfeited. In August 2008, 1,766 shares of restricted stock with a fair value
      of
      $19 thousand became fully vested and outstanding. The following table provides
      a
      summary of the restricted share activity:





Grant DateShares
            
            Fair ValueJanuary
                1, 2007
            
            
            117,766
            
            $
            17.09Granted
                in 2007
            
            
            13,250
            
            
            15.48Forfeited
                in 2007
            
            
            (6,000
            )
            
            17.08Vested
                in 2007
            
            
            (1,500
            )
            
            19.59December
                31, 2007
            
            
            123,516
            
            
            16.89Forfeited
                in 2008
            
            
            (7,000
            )
            
            17.08Vested
                in 2008
            
            
            (1,766
            )
            
            17.08September
                30, 2008
            
            
            114,750
            
            
            17.91




15





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:




·
            An
                economic slowdown could reduce loan originations and fee income volumes
                below expectations, could slow the pace of loan payments or could
                cause
                deposits to decrease.





·
            If
                the economy deteriorated and real estate values became depressed,
                the
                approximately 84% of the Company’s loan portfolio that is secured by real
                estate could come under stress, thus possibly requiring additional
                loan
                loss accruals.





·
            Adverse
                changes in local real estate markets may affect the Company’s ability to
                dispose of its foreclosed real estate at prices above the properties’
                carrying values, thus causing additional
                losses.





·
            Adverse
                changes in interest rates could cause the Company’s net interest margins
                to decrease, thereby decreasing net interest revenues. A spike in
                interest
                rates could reduce the values of interest-sensitive assets such as
                investment securities and loans.





·
            Mortgage
                originations, and therefore mortgage revenues, could be hurt by interest
                rate changes as well as changes in the underwriting standards of
                investors
                who purchase originated mortgages.





·
            An
                unanticipated increase in inflation could cause the Company’s operating
                costs related to salaries, technology, supplies and property taxes
                to
                increase.





·
            A
                poor stock market could reduce brokerage transactions, therefore
                reducing
                investment brokerage revenues.





·
            Adverse
                price changes or liquidity problems in the bond markets could reduce
                the
                values of the Company’s assets as well as impede its ability to raise cash
                through security sales or additional
                borrowings.





·
            Investments
                in the portfolio of the Company’s pension plan may not provide adequate
                returns to fund the accumulated and projected plan obligations, thus
                causing higher annual plan expenses and requiring additional contributions
                by the Company.





·
            Unfavorable
                judgments in ongoing litigation may result in additional expenses.





·
            Unanticipated
                catastrophic events could result in unusual loss claims that would
                reduce
                or eliminate the profit sharing revenues of the insurance agencies.
                Such
                claims may also affect the availability of insurance products for
                certain
                classes of customers, thereby reducing commission revenues available
                to
                the agencies.





·
            Unforeseen
                new competition from outside the traditional financial services industry
                could constrain the Company’s ability to price its products profitably.





·
            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 could result in revenue
                reductions, expense increases or loss of business
                opportunities.





These
      examples are not intended to be exhaustive, and describe events, circumstances
      and contingencies that may never materialize. Nevertheless, the reader is
      cautioned that such types of occurrences, usually outside of the control of
      the
      Company, may cause financial results to be different than the reader or the
      Company’s management had originally estimated.


16





FIRST
      M
& F CORPORATION





**Financial
      Summary**





Net
      income for the third quarter of 2008 was $2.210 million, or $.24 basic and
      diluted earnings per share as compared to $3.808 million, or $.42 basic and
      diluted earnings per share for the same period in 2007 and a net loss of $466
      thousand or $.05 basic and diluted loss per share for the second quarter of
      2008. Net income for the first nine months of 2008 was $4.883 million, or $.54
      basic and $.53 diluted earnings per share as compared to $10.897 million, or
      $1.20 basic and diluted earnings per share for the same period in 2007. Major
      factors contributing to the decrease in year-over-year earnings were (1) an
      additional loan loss accrual of $5.000 million during the second quarter of
      2008, (2) a decrease of $13.222 million in loans outstanding during the first
      nine months of 2008 and (3) a net interest margin of 3.70% for the first nine
      months of 2008 as compared to 3.96% for the first nine months of
      2007.





Highlights
      for the first nine months of 2008 and 2007 are as follows:





·
            Return
                on assets for the first nine months of 2008 was .40% and return on
                equity
                was 4.59%


·
            Return
                on assets for the first nine months of 2007 was .94% and return on
                equity
                was 11.01%


·
            The
                net interest margin decreased to 3.70% in the third quarter of 2008
                from
                3.73% in the second quarter


·
            The
                Tupelo and Desoto County Mississippi markets and the Memphis, Tennessee
                market showed the largest declines during 2008 as loans decreased
                by 1.08%
                during the first nine months of the
                year


·
            The
                Madison County, Mississippi, Memphis, Tennessee, Birmingham, Alabama
                and
                Crestview, Florida markets contributed most of the loan growth for
                the
                third quarter of 2007


·
            Nonaccrual
                loans were 1.82% of total loans at September 30, 2008 as compared
                to .53%
                at September 30, 2007


·
            Annualized
                net charge-offs were .41% for the first nine months of 2008 as compared
                to
                .22% for the first nine months of
                2007


·
            Opened
                a full-service branch in Cordova, Tennessee in June
                2007


·
            Opened
                a full-service branch in Brandon, Mississippi in July 2007 and opened
                a
                full-service branch in Ridgeland, Mississippi in August
                2007


17





FIRST
      M
& F CORPORATION





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





( *Net
      change, in thousands* )


Non-Interest
            
            InterestQuarter
            
            Loans
            
            Bearing Deposits
            
            Bearing Deposits3rd
                Qtr 2007
            
            
            51,581
            
            
            (1,481
            )
            
            4,4274th
                Qtr 2007
            
            
            20,975
            
            
            5,083
            
            
            42,2661st
                Qtr 2008
            
            
            (13,267
            )
            
            (4,126
            )
            
            55,2462nd
                Qtr 2008
            
            
            (10,966
            )
            
            65
            
            
            (45,263
            )3rd
                Qtr 2008
            
            
            11,011
            
            
            (8,165
            )
            
            (8,749
            )





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-InterestQuarter
            
            Income
            
            Accruals
            
            Income
            
            Expense3rd
                Qtr 2007
            
            
            13,786
            
            
            630
            
            
            5,430
            
            
            12,8944th
                Qtr 2007
            
            
            13,725
            
            
            630
            
            
            5,273
            
            
            13,0891st
                Qtr 2008
            
            
            13,127
            
            
            780
            
            
            5,512
            
            
            13,3542nd
                Qtr 2008
            
            
            13,100
            
            
            6,080
            
            
            5,270
            
            
            13,4603rd
                Qtr 2008
            
            
            13,020
            
            
            2,190
            
            
            5,517
            
            
            13,229




The
      following table shows the components of diluted earnings (loss) per share for
      the last five quarters:





3rd Qtr
              2008
            
            2nd Qtr
              2008
            
            1st Qtr
              2008
            
            4th Qtr
              2007
            
            3rd Qtr
              2007Net
                interest income
            
            $
            1.43
            
            $
            1.45
            
            $
            1.44
            
            $
            1.51
            
            $
            1.51Loan
                loss expense
            
            
            .24
            
            
            .67
            
            
            .09
            
            
            .07
            
            
            .07Noninterest
                income
            
            
            .61
            
            
            .58
            
            
            .61
            
            
            .58
            
            
            .59Noninterest
                expense
            
            
            1.46
            
            
            1.49
            
            
            1.47
            
            
            1.44
            
            
            1.41Net
                income (loss) before taxes
            
            
            .34
            
            
            (.13
            )
            
            .49
            
            
            .58
            
            
            .62Income
                taxes
            
            
            .10
            
            
            (.08
            )
            
            .15
            
            
            .19
            
            
            .20Net
                income (loss)
            
            $
            .24
            
            $
            (.05
            )
            $
            .34
            
            $
            .39
            
            $
            .42




18





FIRST
      M
& F CORPORATION





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





3rd Qtr 2008
            
            2ndQtr 2008
            
            1st Qtr 2008
            
            4th Qtr 2007
            
            3rd Qtr 2007Net
                interest margin
            
            
            3.70
            %
            
            3.73
            %
            
            3.66
            %
            
            3.83
            %
            
            3.94
            %Efficiency
                ratio
            
            
            69.93
            
            
            71.85
            
            
            70.33
            
            
            67.68
            
            
            66.08Return
                on assets
            
            
            .55
            
            
            (.12
            )
            
            .76
            
            
            .87
            
            
            .96Return
                on equity
            
            
            6.27
            
            
            (1.30
            )
            
            8.87
            
            
            10.13
            
            
            11.18Noninterest
                income to avg. assets
            
            
            1.37
            
            
            1.31
            
            
            1.34
            
            
            1.29
            
            
            1.36Noninterest
                incometo
                revenues (1)
            
            
            29.16
            
            
            28.13
            
            
            29.03
            
            
            27.31
            
            
            27.83Noninterest
                expense to avg assets
            
            
            3.29
            
            
            3.34
            
            
            3.25
            
            
            3.19
            
            
            3.24Salaries
                and benefits to totalnoninterest
                expense
            
            
            54.66
            
            
            54.28
            
            
            57.33
            
            
            57.23
            
            
            56.63Contribution
                margin (2)
            
            
            61.78
            
            
            61.00
            
            
            59.68
            
            
            61.21
            
            
            62.58Nonaccrual
                loans to loans
            
            
            1.82
            
            
            .94
            
            
            .78
            
            
            .53
            
            
            .5390
                day past due loans to loans
            
            
            .05
            
            
            .33
            
            
            .45
            
            
            .09
            
            
            .16Annualized
                net charge offs as apercent
                of average loans
            
            
            .49
            
            
            .46
            
            
            .27
            
            
            .45
            
            
            .25


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


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





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





(*Dollars
                in thousands*)
            
            3rd Qtr 2008
            
            2nd Qtr 2008
            
            1st Qtr 2008
            
            4th Qtr 2007
            
            3rd Qtr 2007Mortgage
                originations
            
            $
            12,926
            
            $
            17,443
            
            $
            17,697
            
            $
            14,218
            
            $
            19,924Commissions
                from annuity sales
            
            
            18
            
            
            49
            
            
            26
            
            
            26
            
            
            33Trust
                revenues
            
            
            56
            
            
            86
            
            
            72
            
            
            77
            
            
            85Retail
                investment revenues
            
            
            61
            
            
            112
            
            
            66
            
            
            77
            
            
            72Revenues
                per FTE employee
            
            
            34
            
            
            33
            
            
            34
            
            
            34
            
            
            35Agency
                commissions per agencyFTE
                employee (1)
            
            
            29
            
            
            25
            
            
            25
            
            
            17
            
            
            30


(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 2008
            
            2nd Qtr 2008
            
            1st Qtr 2008
            
            4th Qtr 2007
            
            3rd Qtr 2007Full-time
                equivalent employees
            
            
            548
            
            
            556
            
            
            565
            
            
            564
            
            
            555Number
                of noninterest-bearingdeposit
                accounts
            
            
            35,907
            
            
            36,455
            
            
            37,329
            
            
            38,941
            
            
            39,058




19





FIRST
      M
& F CORPORATION





**Net
      Interest Income**





Net
      interest income before loan loss expense for the first nine months of 2008
      was
      $39.247 million as compared to $40.315 million for the first nine months of
      2007. For the first nine months of 2008 compared to 2007: earning asset yields
      decreased by 72 basis points, liability costs decreased by 52 basis points,
      the
      net interest spread decreased by 20 basis points and the net interest margin
      decreased by 26 basis points.





Net
      interest income before loan loss expense for the third quarter of 2008 was
      $13.020 million as compared to $13.786 million for the third quarter of 2007
      and
      $13.100 million for the second quarter of 2008. For the third quarter of 2008
      compared to the same quarter of 2007: earning asset yields decreased by 105
      basis points, liability costs decreased by 93 basis points, the net interest
      spread decreased by 13 basis points and the net interest margin decreased by
      24
      basis points. For the third quarter of 2008 compared to the second quarter
      of
      2008: earning asset yields decreased by 26 basis points, liability costs
      decreased by 27 basis points, the net interest spread remained unchanged and
      the
      net interest margin decreased by 3 basis points.





Balance
      sheet dynamics affecting the comparative net interest margins for the first
      nine
      months of 2008 compared to 2007 include (1) growth of 6.32% in average loans
      held for investment, (2) an increase in average loans as a percentage of earning
      assets from 81.20% in the first nine months of 2007 to 82.45% in the first
      nine
      months of 2008, (3) an increase in average interest-bearing deposits of 7.65%,
      (4) a decrease in average other borrowings of 8.91% and (5) a decrease in
      average noninterest-bearing deposits as a percentage of total assets from 11.61%
      in 2007 to 11.05% in 2008.





Balance
      sheet dynamics affecting the comparative net interest margins for the third
      quarter of 2008 compared to 2007 include (1) growth of 2.75% in average loans
      held for investment, (2) an increase in average loans as a percentage of earning
      assets from 82.33% in the third quarter of 2007 to 83.30% in the third quarter
      of 2008, (3) an increase in average interest-bearing deposits of 4.10%, (4)
      a
      decrease in average other borrowings of 13.43% and (5) a decrease in average
      noninterest-bearing deposits as a percentage of total assets from 11.51% in
      2007
      to 11.11% in 2008.





Balance
      sheet dynamics affecting the comparative net interest margins for the third
      quarter of 2008 compared to the second quarter of 2008 include (1) an increase
      of .44% in average loans held for investment, (2) an increase in average loans
      as a percentage of earning assets from 82.16% in the second quarter of 2008
      to
      83.30% in the third quarter of 2008, (3) a decrease in average interest-bearing
      deposits of 1.98%, (4) an increase in average borrowings of 5.36% and (5) a
      decrease in average noninterest-bearing deposits as a percentage of total assets
      from 11.17% in the second quarter of 2008 to 11.11% in the third quarter of
      2008.





Yield
      and
      cost dynamics affecting the comparative net interest margins for the first
      nine
      months of 2008 compared to 2007 include (1) a decrease of 94 basis points in
      yields on loans held for investment and for sale, (2) an increase of 15 basis
      points in investment and short-term funds yields, (3) a decrease of 48 basis
      points in costs of deposits and (4) a decrease of 56 basis points in costs
      of
      borrowings.





Yield
      and
      cost dynamics affecting the comparative net interest margins for the third
      quarter of 2008 compared to 2007 include (1) a decrease of 132 basis points
      in
      yields on loans held for investment and for sale, (2) an increase of 14 basis
      points in investment and short-term funds yields, (3) a decrease of 93 basis
      points in costs of deposits and (4) a decrease of 71 basis points in costs
      of
      borrowings.





Yield
      and
      cost dynamics affecting the comparative net interest margins for the third
      quarter of 2008 compared to the second quarter of 2008 include (1) a decrease
      of
      32 basis points in yields on loans held for investment and for sale, (2) a
      decrease of 5 basis points in investment and short-term funds yields, (3) a
      decrease of 30 basis points in costs of deposits and (4) a decrease of 18 basis
      points in costs of borrowings.


20





FIRST
      M
& F CORPORATION





The
      decrease in asset yields for the first nine months of 2008 as compared to the
      same period in 2007 can be attributed to (1) a decrease in the prime lending
      rate of 100 basis points during 2007 followed by a decrease of 225 basis points
      during the first four months of 2008, (2) a steady increase in short-term
      interest rates throughout 2006 that plateaued during the first and second
      quarters of 2007 and (3) a moderate level of floating-rate loans as a percent
      of
      loans of approximately 20% at September 30, 2008. Deposit costs for 2008 were
      primarily influenced by short-term interest rate decreases throughout most
      of
      2007 and into 2008 combined with a strategy during 2008 to replace certificates
      of deposit with premium-rate money-market and NOW accounts. Loan yields have
      been influenced downward by the prime rate decreases during 2008. The effect
      of
      prime rate changes on loan yields has been mitigated by the volume of
      variable-rate loans that have reached their loan floor limits. The lack of
      any
      sustained loan growth during 2008 has also contributed to the lower net interest
      margins during 2008.





Net
      interest margins should be affected during the remainder of 2008 by the
      steepness of the yield curve, credit spreads that are being priced into the
      corporate markets, and a slowing in demand for commercial and consumer credit.
      The yield curve between the 3-month and 5-year Treasuries was inverted by 44
      basis points during December 2006 and by 60 basis points during March 2007.
      However, by December 2007 the 3-month to 5-year Treasury spread was a positive
      42 basis points and was 173 basis points during September 2008. The AAA
      corporate bond to 3-month Treasury spread was 35 basis points during December
      2006 and had narrowed to 22 basis points during March 2007. This measure of
      credit spreads was 242 basis points during December 2007 and was 450 basis
      points during September 2008, a direct result of the tightened liquidity in
      the
      corporate debt markets. A contributing factor to the increased third quarter
      2008 spreads of 450 basis points from the second quarter spreads of 379 basis
      points was the flight-to-quality inflow of funds into Treasury securities which
      lowered Treasury yields significantly. The economy has weakened since the second
      quarter of 2007 with a considerable slowing in the consumer real estate sector.
      The Federal Reserve Board has responded by providing liquidity facilities to
      the
      commercial and investment banking sectors as well as through discount rate
      reductions. The Federal Open Market Committee decreased its Fed funds target
      rate by 100 basis points during the second half of 2007, by 200 basis points
      during the first quarter of 2008 and by 25 basis points during the second
      quarter of 2008. Additionally, the Federal Reserve lowered the discount rate
      by
      150 basis points during the second half of 2007, by 225 basis points during
      the
      first quarter of 2008 and by 25 basis points during the second quarter of 2008.
      Corporate bond yields, which hit 24-month highs during the second and third
      quarters of 2007, continue to reflect a lack of liquidity, concerns related
      to
      the ongoing effects of the sub-prime mortgage and credit crisis and uncertainty
      concerning the state of the economy.





Yields
      on
      loans held for investment declined from 7.74% during the fourth quarter of
      2007
      to 6.53% for the third quarter of 2008. Management expects loan yields to
      continue to decrease over the course of 2008. Deposit costs fell by 98 basis
      points during the first nine months of 2008 after steadily rising throughout
      2007. Management expects deposit costs to continue to decrease as certificates
      of deposit mature and reprice in the current lower rate environment or are
      displaced by other competitive interest-bearing checking and money-market
      accounts. While certificates of deposit are not being aggressively marketed,
      the
      focus for 2008 and beyond has been and will continue to be the accumulation
      of
      core deposits and the building of customer relationships that accompany those
      deposits. The base product for this effort during 2008 has been the Summit
      interest-bearing checking account. Balances in this product have grown from
      $4.738 million at the end of 2007 to $53.235 million at September 30, 2008
      with
      an average account size in excess of $9 thousand.


21




FIRST
      M
& F CORPORATION




The
        following table shows the components of the net interest margin for the second
        and third quarters of 2008 and 2007:
 
 Yields/Costs
              
              Yields/Costs3rd Quarter, 2008
              
              2nd Quarter, 2008
              
              3rd Quarter, 2007
              
              2nd Quarter, 2007Interest
                  bearing bank balances
              
              
              1.93
              %
              
              1.96
              %
              
              5.55
              %
              
              4.61
              %Federal
                  funds sold
              
              
              1.61
              
              
              2.72
              
              
              5.14
              
              
              3.59Taxable
                  investments
              
              
              5.04
              
              
              5.18
              
              
              4.81
              
              
              4.80Tax-exempt
                  investments
              
              
              6.08
              
              
              6.21
              
              
              6.22
              
              
              6.26Loans
                  held for sale
              
              
              3.68
              
              
              5.29
              
              
              5.16
              
              
              5.59Loans
                  held for investment
              
              
              6.55
              
              
              6.86
              
              
              7.87
              
              
              7.90Earning
                  asset yield
              
              
              6.32
              
              
              6.58
              
              
              7.37
              
              
              7.36Interest
                  checking
              
              
              1.55
              
              
              1.49
              
              
              1.44
              
              
              1.35Money
                  market deposits
              
              
              2.11
              
              
              2.33
              
              
              2.66
              
              
              2.52Savings
              
              
              2.11
              
              
              2.32
              
              
              2.83
              
              
              2.75Certificates
                  of deposit
              
              
              3.42
              
              
              3.87
              
              
              4.64
              
              
              4.62Short-term
                  borrowings
              
              
              2.25
              
              
              2.29
              
              
              4.92
              
              
              4.98Other
                  borrowings
              
              
              4.61
              
              
              4.82
              
              
              5.12
              
              
              5.12Cost
                  of interest-bearing liabilities
              
              
              2.95
              
              
              3.22
              
              
              3.88
              
              
              3.81Net
                  interest spread
              
              
              3.37
              
              
              3.36
              
              
              3.49
              
              
              3.55Effect
                  of non-interest bearing deposits
              
              
              .36
              
              
              .40
              
              
              .49
              
              
              .49Effect
                  of leverage
              
              
              (.03
              )
              
              (.03
              )
              
              (.04
              )
              
              (.04
              )Net
                  interest margin, tax-equivalent
              
              
              3.70
              
              
              3.73
              
              
              3.94
              
              
              4.00Less:
                  Tax equivalent adjustments:Investments
              
              
              .09
              
              
              .09
              
              
              .07
              
              
              .08Loans
              
              
              .01
              
              
              .01
              
              
              .01
              
              
              .01Reported
                  book net interest margin
              
              
              3.60
              %
              
              3.63
              %
              
              3.86
              %
              
              3.91
              %
 
 The
        following table shows the components of the net interest margin for the first
        nine months of 2008 and 2007:
 
 Yields/CostsYTD September
                2008
              
              YTD September
                2007Interest
                  bearing bank balances
              
              
              2.58
              %
              
              5.01
              %Federal
                  funds sold
              
              
              2.94
              
              
              4.20Taxable
                  investments
              
              
              5.08
              
              
              4.81Tax-exempt
                  investments
              
              
              6.17
              
              
              6.25Loans
                  held for sale
              
              
              4.96
              
              
              5.33Loans
                  held for investment
              
              
              6.92
              
              
              7.86Earning
                  asset yield
              
              
              6.62
              
              
              7.34Interest
                  checking
              
              
              1.50
              
              
              1.39Money
                  market deposits
              
              
              2.38
              
              
              2.50Savings
              
              
              2.39
              
              
              2.74Certificates
                  of deposit
              
              
              3.95
              
              
              4.61Short-term
                  borrowings
              
              
              2.45
              
              
              5.06Other
                  borrowings
              
              
              4.73
              
              
              5.13Cost
                  of interest-bearing liabilities
              
              
              3.29
              
              
              3.81Net
                  interest spread
              
              
              3.33
              
              
              3.53Effect
                  of non-interest bearing deposits
              
              
              .40
              
              
              .49Effect
                  of leverage
              
              
              (.03
              )
              
              (.06
              )Net
                  interest margin, tax-equivalent
              
              
              3.70
              
              
              3.96Less:
                  Tax equivalent adjustments:Investments
              
              
              .09
              
              
              .08Loans
              
              
              .01
              
              
              .01Reported
                  book net interest margin
              
              
              3.60
              %
              
              3.87
              %
  22
  FIRST
        M
& F CORPORATION
 
 The
        following table shows average balance sheets for the second and third quarters
        of 2008 and 2007:
 
 *(Dollars in thousands)*3rd Quarter, 2008
              
              2nd Quarter, 2008
              
              3rd Quarter, 2007
              
              2nd Quarter, 2007Interest
                  bearing bank balances
              
              $
              3,228
              
              $
              5,627
              
              $
              5,713
              
              $
              4,726Federal
                  funds sold
              
              
              2,400
              
              
              6,783
              
              
              2,752
              
              
              6,247Taxable
                  investments
              
              
              171,936
              
              
              182,982
              
              
              190,105
              
              
              197,922Tax-exempt
                  investments
              
              
              57,809
              
              
              56,376
              
              
              43,836
              
              
              45,654Loans
                  held for sale
              
              
              4,986
              
              
              7,406
              
              
              8,084
              
              
              9,786Loans
                  held for investment
              
              
              1,198,943
              
              
              1,193,703
              
              
              1,166,820
              
              
              1,122,129Earning
                  assets
              
              
              1,439,302
              
              
              1,452,877
              
              
              1,417,310
              
              
              1,386,464Other
                  assets
              
              
              159,911
              
              
              168,688
              
              
              163,470
              
              
              159,594Total
                  assets
              
              $
              1,599,213
              
              $
              1,621,565
              
              $
              1,580,780
              
              $
              1,546,058Interest
                  checking
              
              $
              215,559
              
              $
              211,590
              
              $
              187,350
              
              $
              190,049Money
                  market deposits
              
              
              178,733
              
              
              186,740
              
              
              133,246
              
              
              136,525Savings
                  deposits
              
              
              116,658
              
              
              116,720
              
              
              103,089
              
              
              99,997Certificates
                  of deposit
              
              
              565,156
              
              
              582,841
              
              
              610,032
              
              
              578,631Short-term
                  borrowings
              
              
              17,269
              
              
              17,693
              
              
              10,227
              
              
              12,069Other
                  borrowings
              
              
              180,793
              
              
              171,600
              
              
              208,839
              
              
              204,199Interest-bearing
                  liabilities
              
              
              1,274,168
              
              
              1,287,184
              
              
              1,252,783
              
              
              1,221,470Noninterest-bearing
                  deposits
              
              
              177,595
              
              
              181,134
              
              
              182,008
              
              
              181,819Other
                  liabilities
              
              
              7,135
              
              
              9,197
              
              
              10,832
              
              
              10,133Stockholders’
                  equity
              
              
              140,315
              
              
              144,050
              
              
              135,157
              
              
              132,636Liabilities
                  and stockholders’ equity
              
              $
              1,599,213
              
              $
              1,621,565
              
              $
              1,580,780
              
              $
              1,546,058Loans
                  to earning assets
              
              
              83.30
              %
              
              82.16
              %
              
              82.33
              %
              
              80.93
              %Loans
                  to assets
              
              
              74.97
              %
              
              73.61
              %
              
              73.81
              %
              
              72.58
              %Earning
                  assets to assets
              
              
              90.00
              %
              
              89.60
              %
              
              89.66
              %
              
              89.68
              %Noninterest-bearing
                  deposits to assets
              
              
              11.11
              %
              
              11.17
              %
              
              11.51
              %
              
              11.76
              %Equity
                  to assets
              
              
              8.77
              %
              
              8.88
              %
              
              8.55
              %
              
              8.58
              %
 
 The
        following table shows average balance sheets for the first nine months of
        2008
        and 2007:
 
 *(Dollars in thousands)*YTD September
                2008
              
              YTD September
                2007Interest
                  bearing bank balances
              
              $
              6,238
              
              $
              4,719Federal
                  funds sold
              
              
              6,534
              
              
              3,298Taxable
                  investments
              
              
              181,080
              
              
              199,032Tax-exempt
                  investments
              
              
              55,450
              
              
              45,668Loans
                  held for sale
              
              
              6,493
              
              
              8,860Loans
                  held for investment
              
              
              1,201,912
              
              
              1,130,514Earning
                  assets
              
              
              1,457,707
              
              
              1,392,091Other
                  assets
              
              
              167,441
              
              
              163,973Total
                  assets
              
              $
              1,625,148
              
              $
              1,556,064Interest
                  checking
              
              $
              209,949
              
              $
              194,265Money
                  market deposits
              
              
              177,066
              
              
              132,379Savings
                  deposits
              
              
              115,123
              
              
              100,031Certificates
                  of deposit
              
              
              594,214
              
              
              591,809Short-term
                  borrowings
              
              
              14,105
              
              
              12,266Other
                  borrowings
              
              
              184,401
              
              
              202,437Interest-bearing
                  liabilities
              
              
              1,294,858
              
              
              1,233,187Noninterest-bearing
                  deposits
              
              
              179,622
              
              
              180,610Other
                  liabilities
              
              
              8,429
              
              
              9,988Stockholders’
                  equity
              
              
              142,239
              
              
              132,279Liabilities
                  and stockholders’ equity
              
              $
              1,625,148
              
              $
              1,556,064Loans
                  to earning assets
              
              
              82.45
              %
              
              81.21
              %Loans
                  to assets
              
              
              73.96
              %
              
              72.65
              %Earning
                  assets to assets
              
              
              89.70
              %
              
              89.46
              %Noninterest-bearing
                  deposits to assets
              
              
              11.05
              %
              
              11.61
              %Equity
                  to assets
              
              
              8.75
              %
              
              8.50
              %
  23
  FIRST
        M
& F CORPORATION
 
 **Provision
        for Loan Losses**
 
 The
        accrual for the provision for loan losses for the first nine months of 2008
        was
        $9.050 million as compared to $1.890 million for the first nine months of
        2007.
        Net charge-offs were $3.649 million for the first nine months of 2008 as
        compared to $1.899 million for the first nine months of 2007.
 
 The
        accrual for the provision for loan losses for the third quarter of 2008 was
        $2.190 million as compared to $630 thousand for the third quarter of 2007.
        The
        allowance for loan losses as a percentage of loans was 1.63% at September
        30,
        2008, 1.17% at December 31, 2007, and 1.25% at September 30, 2007. Net
        charge-offs were $1.473 million during the third quarter of 2008, $1.375
        million
        during the second quarter of 2008 and $801 thousand during the first quarter
        of
        2008 as compared to $1.899 million for the first nine months of
        2007.
 
 Nonaccrual
        loans as a percentage of loans increased to 1.82% at September 30, 2008 as
        compared to .53% at December 31, 2007, and .53% at September 30, 2007. The
        Company saw credit quality deteriorate during the second and third quarters
        of
        2008 in the construction, acquisition and land development portfolio. Although
        the Company has virtually no sub-prime exposure, it is affected by the slowdown
        in the housing market and the continued decrease in housing prices. Business
        activity and cash flows in the commercial real estate segment of the Company’s
        loan portfolio have been affected by the slowing economy and by the indirect
        effects of the sub-prime mortgage fallout in 2008. A lack of liquidity in
        the
        form of credit for potential buyers of properties has also negatively affected
        real estate-related credit quality statistics. The effect of the slowing
        economy
        on credit quality statistics in the real estate portfolio can be seen in
        the
        following table:
 
 Past Due
              
              Past Due 90*(Dollars in thousands)*
              
              30 – 89 Days
              
              Days andand Still Accruing
              
              Still Accruing
              
              NonaccrualConstruction
                  and development loans at 09/30/08
              
              $
              12,229
              
              $
              156
              
              $
              16,158Construction
                  and development loans at 06/30/08
              
              $
              10,555
              
              $
              1,411
              
              $
              6,188Construction
                  and development loans at 12/31/07
              
              $
              2,606
              
              $
              404
              
              $
              3,444Loans
                  secured by 1-4 family properties at 09/30/08
              
              $
              3,555
              
              $
              80
              
              $
              2,281Loans
                  secured by 1-4 family properties at 06/30/08
              
              $
              3,079
              
              $
              501
              
              $
              1,479Loans
                  secured by 1-4 family properties at 12/31/07
              
              $
              2,833
              
              $
              501
              
              $
              1,653Commercial
                  real estate-secured loans at 09/30/08
              
              $
              2,455
              
              $
              342
              
              $
              2,771Commercial
                  real estate-secured loans at 06/30/08
              
              $
              4,024
              
              $
              131
              
              $
              2,942Commercial
                  real estate-secured loans at 12/31/07
              
              $
              816
              
              $
              29
              
              $
              943
 
 The
        Company continues to monitor real estate and commercial exposures on a monthly
        basis in order to address any problems in the earliest stages.
 
 **Non
        Interest Income**
 
 Noninterest
        income, excluding securities transactions and losses on debt extinguishment,
        for
        the first nine months of 2008 was $16.294 million as compared to $16.173
        million
        for the same period in 2007. For the first nine months of 2008 as compared
        to
        2007: (1) deposit revenues increased by $791 thousand,
 (2)
        mortgage banking revenues decreased by $132 thousand and (3) agency commissions
        increased by $23 thousand.
 
 Noninterest
        income, excluding securities transactions and losses on debt extinguishment,
        for
        the third quarter of 2008 was $5.534 million as compared to $5.430 million
        for
        the same period in 2007 and $5.259 million in the second quarter of 2008.
        For
        the third quarter of 2008 as compared to the third quarter of 2007:
 (1)
        deposit revenues increased by $265 thousand, (2) mortgage banking revenues
        increased by $17 thousand and (3) agency commissions increased by $34 thousand.
        For the third quarter of 2008 as compared to the second quarter of 2008:
        (1)
        deposit revenues increased by $112 thousand, (2) mortgage banking revenues
        increased by $157 thousand and (3) agency commissions increased by $116
        thousand.
  24
  FIRST
        M
& F CORPORATION
 
 Deposit
        revenues improved by 9.92% for the first nine months of 2008 as compared
        to
        2007. The third quarter of 2008 showed an increase of 9.54% over the third
        quarter of 2007 and a 3.79% increase over the second quarter of 2008. Overdraft
        fee revenues, which comprise approximately 70% of deposit revenues, increased
        by
        9.29% from the first nine months of 2007 to the first nine months of 2008,
        increased by 8.73% from the third quarter of 2007 to the third quarter of
        2008
        and increased by 5.35% from the second quarter of 2008 to the third quarter
        of
        2008. The third quarter improvements were due to increased item volumes as
        third
        quarter volumes exceeded second quarter volumes by 5.35% and exceeded third
        quarter 2007 volumes by 8.71%. 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 comes 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 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 improved by 20.13% from the first nine months of 2007 to the
        first
        nine months of 2008, increased by 20.71% from the third quarter of 2007 to
        the
        third quarter of 2008 and increased by 2.12% from the second quarter of 2008
        to
        the third quarter of 2008.
 
 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 2008. The following table shows
        the
        components of service charges on deposit accounts:
 
 Three Months Ended
              
              Nine Months Ended*(Dollars in thousands)*
              
              September 30
              
              September 302008
              
              2007
              
              2008
              
              2007Service
                  charge revenues
              
              $
              348
              
              $
              352
              
              $
              1,060
              
              $
              1,061Debit/ATM
                  card revenues
              
              
              577
              
              
              478
              
              
              1,659
              
              
              1,381Overdraft
                  fee revenues
              
              
              2,117
              
              
              1,947
              
              
              6,046
              
              
              5,532Service
                  charges on deposit accounts
              
              $
              3,042
              
              $
              2,777
              
              $
              8,765
              
              $
              7,974
 
 Mortgage
        banking income decreased by 11.52% from the first nine months of 2007 to
        the
        first nine months of 2008, increased by 4.57% from the third quarter of 2007
        to
        the third quarter of 2008 and increased by 67.67% from the second quarter
        of
        2008 to the third quarter of 2008. Mortgage originations decreased by 12.36%
        from the first nine months of 2007 to the first nine months of 2008, decreased
        by 35.12% from the third quarter of 2007 to the third quarter of 2008 and
        decreased by 25.90% from the second quarter of 2008 to the third quarter
        of
        2008. Mortgage rates decreased steadily from their highs in June 2007 to
        end
        2007 at 6.17%. Mortgage rates fell to 5.85% by the end of the first quarter
        of
        2008. During June and July of 2008 mortgage rates moved up over 6.50% to
        a high
        of 6.63% in late July and subsequently moved downward over time to end September
        2008 at 6.09%. The conventional mortgage market experienced a slowdown during
        the second half of 2007 but began to return to normal conditions in the bank’s
        metropolitan markets during the first quarter of 2008. The lower volumes
        of
        originations in 2008 as compared to 2007 and the higher mortgage rates during
        2008 contributed to the decline in mortgage revenues. Application volumes
        remained steady through 2007 and into 2008. However, application volumes
        declined during the third quarter of 2008 and are expected to stay low for
        the
        foreseeable future. The bank has also experienced a decline in approval rates
        during 2008. These approval, or “pull-through,” rates have been influenced by
        the tightened credit standards of institutional mortgage purchasers. Management
        expects to continue to expand its mortgage presence in its economically stronger
        markets.
 
 Agency
        commission income increased by .73% from the first nine months of 2007 to
        the
        first nine months of 2008, increased by 3.04% from the third quarter of 2007
        to
        the third quarter of 2008 and increased by 11.19% from the second quarter
        of
        2008 to the third quarter of 2008. The minimal increase from the first nine
        months of 2007 to the first nine months of 2008 was due primarily to a 41.68%
        decrease in title insurance commissions as property & casualty commissions
        increased by 2.33% over the same period. For the third quarter of 2008 as
        compared to the third quarter of 2007, property & casualty commissions
        increased by 4.97% while title insurance commissions decreased by 12.40%.
        Management expects to see growth in commission revenues for the year as compared
        to 2007.
  25
  FIRST
        M
& F CORPORATION
 
 Significant
        components of other income for the second and third quarters of 2008 and
        2007
        are contained in the following table:
 
 *(Dollars
                  in thousands)*
              
              3Q2008
              
              2Q2008
              
              3Q2007
              
              2Q2007Agency
                  profit-sharing revenues
              
              $
              -
              
              $
              6
              
              $
              -
              
              $
              24Loan
                  fees
              
              
              226
              
              
              113
              
              
              135
              
              
              111Gains
                  on student loan sales
              
              
              91
              
              
              88
              
              
              181
              
              
              61All
                  other income
              
              
              377
              
              
              458
              
              
              519
              
              
              470Total
                  other income
              
              $
              694
              
              $
              665
              
              $
              835
              
              $
              666
 
 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
        increased from 28.01% for the first nine months of 2007 to 28.78% for the
        first
        nine months of 2008. Noninterest revenues as a percentage of total revenues
        increased from 27.83% in the third quarter of 2007 to 29.16% in the third
        quarter of 2008, and increased from 28.13% in the second quarter of 2008
        to
        29.16% in the third quarter of 2008. Another metric that the Company monitors
        is
        revenues per full-time employee, which was approximately $34 thousand per
        employee for the third quarter of 2008 and $33 thousand per employee for
        the
        second quarter of 2008 as compared to $35 thousand for the third quarter
        of 2007
        and $33 thousand for the second quarter of 2007. Insurance product revenues
        per
        producer decreased slightly from $30 thousand per producer in the third quarter
        of 2007 and $25 thousand per producer in the second quarter of 2007 to $29
        thousand per producer in the third quarter of 2008 and $25 thousand per producer
        in the second quarter of 2008. 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.
 
 **Non
        Interest Expense**
 
 Noninterest
        expenses increased by 4.59% from the first nine months of 2007 to the first
        nine
        months of 2008, increased by 2.60% from the third quarter of 2007 to the
        third
        quarter of 2008 and decreased by 1.72% from the second quarter of 2008 to
        the
        third quarter of 2008.
 
 Salary
        and benefit expenses, which comprise approximately 60% of noninterest expenses,
        increased by 1.54% from the first nine months of 2007 to the first nine months
        of 2008, decreased by .99% from the third quarter of 2007 to the third quarter
        of 2008 and decreased by 1.05% from the second quarter of 2008 to the third
        quarter of 2008. The number of full-time equivalent employees was 548 at
        September 30, 2008, 556 at June 30, 2008, 555 at September 30, 2007, and
        562 at
        June 30, 2007. Health care costs contributed to the increase in salaries
        and
        benefits for the first nine months of 2008 over 2007 as they increased by
        approximately $788 thousand, or 89.60%, for the comparative periods. Excluding
        health care costs, salaries and employee benefits were down by $432 thousand
        from the third quarter of 2007 to the third quarter of 2008. Noninterest
        expenses as a percent of average assets remained unchanged at 3.29% from
        the
        first nine months of 2007 to the first nine months of 2008, increased from
        3.24%
        in the third quarter of 2007 to 3.29% in the third quarter of 2008, and
        decreased from 3.34% in the second quarter of 2008 to 3.29% in the third
        quarter
        of 2008.
 
 The
        business expansion efforts during 2007 also produced an increase in related
        occupancy expenses as four new locations were added during 2007. This resulted
        in a 12.58% increase in occupancy expense from the first nine months of 2007
        to
        the first nine months of 2008.
 
 Significant
        components of other expense for the second and third quarters of 2008 and
        2007are contained in the following table:
 
 *(Dollars
                  in thousands)*
              
              3Q2008
              
              2Q2008
              
              3Q2007
              
              2Q2007Postage
                  and shipping
              
              $
              237
              
              $
              228
              
              $
              198
              
              $
              175Supplies
              
              
              199
              
              
              194
              
              
              274
              
              
              221Legal
                  expenses
              
              
              224
              
              
              197
              
              
              115
              
              
              141Other
                  professional expenses
              
              
              127
              
              
              180
              
              
              196
              
              
              143Insurance
                  expenses
              
              
              230
              
              
              110
              
              
              238
              
              
              118Debit
                  card processing expenses
              
              
              184
              
              
              178
              
              
              158
              
              
              155Foreclosed
                  property expense
              
              
              191
              
              
              527
              
              
              49
              
              
              94All
                  other expenses
              
              
              1,304
              
              
              1,327
              
              
              1,250
              
              
              1,223Total
                  other expense
              
              $
              2,696
              
              $
              2,941
              
              $
              2,478
              
              $
              2,270
  26
  FIRST
        M
& F CORPORATION
 
 **Income
        Taxes**
 
 Income
        tax expenses for the first nine months of 2008 decreased by $3.711 million
        from
        the first nine months of 2007. Pre-tax earnings for the first nine months
        of
        2008 were down by $9.735 million from the same period in 2007. The effective
        tax
        rates for the first nine months of 2008 and 2007 were 24.16% and 32.56%
        respectively. The difference in effective rates was primarily due to the
        tax
        effect of an additional $5.000 million loan loss accrual during the second
        quarter of 2008 and an additional $750 thousand loan loss accrual during
        the
        third quarter of 2008. The following table shows the earnings and tax effect
        of
        the $5.750 million loan loss accrual on 2008’s financial results:
 
 *(Dollars in thousands)*
              
              Before Loan Loss Accrual
              
              Loan Loss Accrual Effect
              
              Earnings as DisclosedNet
                  income before tax
              
              $
              12,203
              
              $
              (5,750
              )
              $
              6,453Income
                  taxes
              
              
              3,706
              
              
              (2,145
              )
              
              1,561Net
                  income before noncontrolling interests
              
              $
              8,497
              
              $
              (3,605
              )
              $
              4,892Effective
                  tax rate before noncontrolling interests
              
              
              30.37
              %
              
              37.30
              %
              
              24.19
              %
 
 The
        Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes – An Interpretation of FASB Statement No. 109” as of January 31,
        2007 with no adjustment for uncertain tax positions, and therefore no effect
        on
        the Company’s financial position or results of operations. The Company had no
        recognized uncertain tax positions as of September 30, 2008 and therefore
        has
        not had any tax accruals in 2008 related to uncertain
        positions.
 
 **Assets
        and Liabilities**
 
 Assets
        increased by 1.08% from September 30, 2007 to September 30, 2008, and decreased
        by .76% from December 31, 2007. Investments decreased by 7.15% from September
        30, 2007 to September 30, 2008 and decreased by 7.25% from December 31, 2007.
        Liquidity provided by first quarter 2008 deposit growth and net decreases
        in
        loans was used to pay down borrowings that were used to fund loan growth
        during
        2007. The Company pre-funded the reinvestment of first quarter 2008
        government-sponsored agency securities during the third and fourth quarters
        of
        2007 by borrowing the approximate maturity amounts and investing the funds
        in an
        effort to take advantage of the higher yield environment at the time. The
        maturities of approximately $32.6 million during the first quarter of 2008
        were
        used to pay off the short-term borrowings that were obtained in 2007. The
        2007
        purchases were primarily mortgage-backed securities and municipal bonds.
        The
        loan and investment portfolios were sources of liquidity during the first
        nine
        months of 2008 as the economic environment dictated a slower pace of new
        business. Asset cash flows were primarily used to fund certificate of deposit
        maturities. Loans grew by .65% from September 30, 2007 to September 30, 2008
        and
        decreased by 1.08% from December 31, 2007. Loans decreased by $13.267 million
        during the first quarter of 2008 and by $10.966 million during the second
        quarter of 2008 as the economy slowed and the real estate sector contracted.
        The
        third quarter of 2008 saw $11.011 million in loan growth, primarily in the
        commercial and asset-based lending portfolios. Loan growth has been weak
        in most
        markets during 2008. Commercial real estate loans showed moderate growth
        while
        all other sectors of the portfolio decreased. Management expects that the
        loan
        portfolio will decrease for the remainder of the year and will possibly remain
        flat through 2009 as the economy is expected to remain weak and more focus
        is
        brought to working out nonperforming loans. Loans as a percent of total assets
        were 73.49% at September 30, 2008, 73.90% at June 30, 2008, 73.74% at December
        31, 2007, and 73.81% at September 30, 2007.
  27
  FIRST
        M
& F CORPORATION
 
 The
        following table shows loans held for investment by type as of September 30,
        2008, December 31, 2007, and September 30, 2007:
 
 *(Dollars in thousands)*
              
              September 30, 2008
              
              December 31, 2007
              
              September 30, 2007Commercial
                  real estate
              
              $
              759,279
              
              $
              731,595
              
              $
              713,619Residential
                  real estate
              
              
              208,718
              
              
              223,614
              
              
              221,915Home
                  equity lines
              
              
              46,201
              
              
              45,987
              
              
              44,964Commercial,
                  financial and agricultural
              
              
              145,743
              
              
              169,447
              
              
              164,866Consumer
              
              
              38,001
              
              
              40,860
              
              
              40,374Other
                  loans
              
              
              8,271
              
              
              7,932
              
              
              12,722Total
              
              $
              1,206,213
              
              $
              1,219,435
              
              $
              1,198,460Mortgages
                  held for sale
              
              $
              2,783
              
              $
              2,063
              
              $
              4,103Student
                  loans held for sale
              
              
              2,683
              
              
              3,508
              
              
              2,731
 
 Deposits
        increased by 2.99% from September 30, 2007 to September 30, 2008 and decreased
        by .87% from December 31, 2007. The following table shows the breakdown by
        deposit category of core deposits and public funds deposits growth from December
        31, 2007 to September 30, 2008:
 
 Core Customers
              
              Public Funds
              
              Total Deposits*(Dollars in thousands)*
              
              Increase (Decrease)
              
              Increase (Decrease)
              
              Increase (Decrease)Amt.
              
              Pct.
              
              Amt.
              
              Pct.
              
              Amt.
              
              Pct.Noninterest-bearing
              
              $
              (12,997
              )
              
              (7.60
              )%
              $
              771
              
              
              10.61
              %
              $
              (12,226
              )
              
              (6.83
              )%NOW
              
              
              40,754
              
              
              32.89
              
              
              (11,209
              )
              
              (20.40
              )
              
              29,545
              
              
              15.54MMDA
              
              
              7,347
              
              
              5.21
              
              
              12,488
              
              
              80.69
              
              
              19,835
              
              
              12.69Savings
              
              
              9,013
              
              
              8.53
              
              
              104
              
              
              35.86
              
              
              9,117
              
              
              8.61Customer
                  CDs
              
              
              (43,408
              )
              
              (9.51
              )
              
              (2,818
              )
              
              (3.20
              )
              
              (46,226
              )
              
              (8.49
              )Brokered
                  CDs
              
              
              (12,081
              )
              
              (83.88
              )
              
              1,044
              
              
              66.08
              
              
              (11,037
              )
              
              (64.82
              )Total
              
              $
              (11,372
              )
              
              (1.06
              )%
              $
              380
              
              
              .21
              %
              $
              (10,992
              )
              
              (.88
              )%
 
 The
        savings deposit increases were primarily in Flex Fund and Liberty Fund accounts,
        which are renewable deposit accounts with two year maturities and that pay
        interest, indexed to historical Treasury rates, on a quarterly basis.
        Interest-bearing checking and money market core customer deposits were up
        during
        2008 due to targeted campaigns in both product areas. A new interest-bearing
        checking account, the Summit Checking account, was introduced during the
        fourth
        quarter of 2007. This 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, which are classified as NOW accounts,
        increased by $48.544 million during 2008. Money market accounts with premium
        rates for high balances have also been used to attract core customers.
        Certificates of deposit decreased in 2008 as the interest-bearing checking
        and
        money market accounts were used instead of time deposits to attract funding.
        The
        Company maintained a moderate pricing strategy with regard to certificates
        of
        deposit, preferring to market accounts that could be used as a base upon
        which
        to further build customer relationships. Customer and employee incentives
        were
        used during 2008 to promote checking and interest-bearing transaction accounts
        over more price-sensitive certificates of deposit. 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. During the first quarter of 2008
        the
        Company introduced new relationship-based checking account products with
        a
        variety of add-ons designed to enhance the customer’s banking experience.
        Another 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. The Company
        made a move away from brokered time deposits during the second quarter of
        2008
        in favor of core deposit funding alternatives. Additionally, when borrowed
        funds
        are less costly than time deposits or brokered deposits, the Company will
        still
        look to those sources to help maintain the spread between the yield on earning
        assets and the cost of funds.
  28
  FIRST
        M
& F CORPORATION
 
 The
        following table shows the deposit mix as of September 30, 2008, December
        31,
        2007, and September 30, 2007:
 
 *(Dollars in thousands)*
              
              September 30, 2008
              
              December 31, 2007
              
              September 30, 2007Noninterest-bearing
                  demand
              
              $
              178,980
              
              $
              191,206
              
              $
              186,123NOW
                  deposits
              
              
              219,612
              
              
              190,067
              
              
              186,944Money
                  market deposits
              
              
              176,199
              
              
              156,364
              
              
              129,505Savings
                  deposits
              
              
              115,041
              
              
              105,924
              
              
              105,819Certificates
                  of deposit
              
              
              544,605
              
              
              590,831
              
              
              580,376Brokered
                  certificates of deposit
              
              
              17,026
              
              
              28,063
              
              
              26,339Total
              
              $
              1,251,463
              
              $
              1,262,455
              
              $
              1,215,106
 
 The
        following table shows the mix of public funds deposits as of September 30,
        2008,
        December 31, 2007, and September 30, 2007:
 
 *(Dollars in thousands)*
              
              September 30, 2008
              
              December 31, 2007
              
              September 30, 2007Noninterest-bearing
                  demand
              
              $
              8,041
              
              $
              7,270
              
              $
              7,782NOW
                  deposits
              
              
              54,948
              
              
              66,157
              
              
              69,596Money
                  market deposits
              
              
              27,965
              
              
              15,477
              
              
              14,719Savings
                  deposits
              
              
              394
              
              
              290
              
              
              292Certificates
                  of deposit
              
              
              88,064
              
              
              90,882
              
              
              109,744Brokered
                  certificates of deposit
              
              
              2,624
              
              
              1,580
              
              
              1,374Total
              
              $
              182,036
              
              $
              181,656
              
              $
              203,507
 
 Other
        borrowings decreased by $3.670 million from September 30, 2007 to September
        30,
        2008 and by $3.765 million from December 31, 2007. The decreases in borrowings
        were primarily the result of first quarter of 2008 payoffs of the borrowings
        used to pre-fund investment purchases in 2007, offset by borrowing increases
        during the third quarter of 2008 that were primarily held as liquidity reserves.
        Amounts of borrowings maturing within one year decreased from 58.27% of other
        borrowings at December 31, 2007 to 43.21% at September 30, 2008. 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.
  29
  FIRST
        M
& F CORPORATION
 
 **Equity**
 
 The
        Company’s and Bank’s regulatory capital ratios at September 30, 2008, as shown
        below are in excess of the minimum requirements and qualify the institution
        as
“well capitalized” under the risk-based capital regulations.
 
 *(Dollars in thousands)*
              
              First M & F Corporation
              
              M & F BankAmount
              
              Ratio
              
              Amount
              
              RatioActual:Total
                  risk-based capital
              
              $
              151,775
              
              
              11.09
              %
              $
              152,936
              
              
              11.18
              %Tier
                  1 capital
              
              
              134,640
              
              
              9.84
              %
              
              135,813
              
              
              9.93
              %Leverage
              
              
              134,640
              
              
              8.61
              %
              
              135,813
              
              
              8.69
              %For
                  Capital Adequacy Purposes:Total
                  risk-based capital
              
              
              109,470≥
              
              
              8.00
              %
              
              109,388≥
              
              
              8.00
              %Tier
                  1 capital
              
              
              54,735≥
              
              
              4.00
              %
              
              54,694≥
              
              
              4.00
              %Leverage
              
              
              62,547≥
              
              
              4.00
              %
              
              62,507≥
              
              
              4.00
              %To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions:Total
                  capital
              
              
              
              
              
              
              
              
              136,735≥
              
              
              10.00
              %Tier
                  1 capital
              
              
              
              
              
              
              
              
              82,041≥
              
              
              6.00
              %Leverage
              
              
              
              
              
              
              
              
              78,134≥
              
              
              5.00
              %
 
 The
        Company repurchased 7,500 shares during the first nine months of 2008 at
        an
        average price of $15.55 per share. The Company issued 19,854 shares upon
        the
        exercise of stock options during the first nine months of 2007 at an average
        exercise price of $15.37 per share. The Company did not issue any shares
        upon
        the exercise of stock options during the first nine months of 2008. The Company
        periodically performs stress tests on its capital position in order to determine
        the magnitude of losses that the capital base can absorb before additional
        sources of equity would be required. Management believes that the Company
        is
        adequately capitalized given all known and expected losses and has no plans
        to
        lower the quarterly dividend. The banking industry has been given the
        opportunity to apply for funding through the U. S. Treasury Department’s Capital
        Purchase Program in the form of perpetual preferred stock, accompanied by
        common
        stock warrants issued to the U.S. Treasury. The Company has not determined
        whether it will apply for the funds as an additional capital
        resource.
 
 The
        Company’s shares, listed as FMFC on the NASDAQ Global Select Market, trade at
        the rate of approximately 2,500 shares per day. The Company’s price-to-earnings
        ratio, based upon the prior four quarters’ earnings, was 12.59 as of September
        30, 2008.
 
 **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, 2008, 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 slightly 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.
  30
  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 as well as by internal and external
        loan
        review personnel, past due loans, collateral reviews, loan growth and loss
        history. Also, as part of this evaluation, individual loans are reviewed
        for
        impairment. 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 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) competitive 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 will be reviewed on a quarterly basis.
 
 The
        Company has experienced stress in the construction and land development
        portfolio as well as in its commercial real estate-secured portfolio. As
        shown
        in the tables for the Provision for Loan Losses discussion, the Company
        experienced a large increase in the amount of past due real estate-secured
        loans
        during 2008. Many of these loans, as a result of internal and external loan
        reviews, have been classified as watch loans and in many cases downgraded
        for
        the Company’s internal credit monitoring systems. The Company accrued an
        additional $5.000 million into the allowance for loan losses in June 2008
        and an
        additional $750 thousand in September 2008 based upon it’s evaluation of the
        liquidity of these and other real estate loans and their underlying collateral
        values. Management is working with these borrowers to create and implement
        plans
        for the orderly payment of these loans through collateral liquidation, other
        available cash flow sources, and other acceptable workout
        solutions.
 
 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. 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.
  31
  FIRST
        M
& F CORPORATION
 
 Nonaccrual
        loans and non-performing assets increased during the first nine months of
        2008
        as the economy, especially the real estate sector, slowed. No significant
        losses
        have been incurred in 2008 as is reflected by the annualized rate of net
        charge-offs to loans of .41%. The Company is working out problem loans as
        customer cash flows and the market will allow. The future trend in problem
        loans
        will depend on how fast the market can absorb properties in an orderly fashion.
        Another factor affecting the speed with which construction and development
        loans
        may be worked out is the state of available credit to potential buyers of
        properties. As long as credit markets are frozen the Company and its customers
        will have difficulty liquidating the properties collateralizing construction
        and
        development loans. These conditions will extend the horizon for loan workouts
        as
        well as for the resumption of normal business in the Company’s markets.
        Management is also monitoring the state of our markets for indirect effects
        of
        the sub-prime mortgage fallout on the commercial and consumer sectors of
        the
        portfolio as the economy continues to slow.
 
 The
        following table shows non-performing loans and other assets of the
        Company:
 
 (*Dollars in thousands*)
              
              September 30
              
              December 31
              
              September 302008
              
              2007
              
              2007Nonaccrual
                  loans
              
              $
              22,095
              
              $
              6,524
              
              $
              6,334Other
                  real estate
              
              
              7,191
              
              
              6,232
              
              
              4,926Total
                  non-performing assets
              
              $
              29,286
              
              $
              12,756
              
              $
              11,260Past
                  due 90 days or more and still accruing interest
              
              
              634
              
              
              1,093
              
              
              1,955Ratios:Nonaccrual
                  loans to loans
              
              
              1.82
              %
              
              .53
              %
              
              .53
              %Past
                  due 90 day loans to loans
              
              
              .05
              %
              
              .09
              %
              
              .16
              %Non-performing
                  assets to loans and other real estate
              
              
              2.40
              %
              
              1.04
              %
              
              .93
              %Non-performing
                  assets to assets
              
              
              1.78
              %
              
              .77
              %
              
              .69
              %
 
 **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, 2008 the Company
        had $188.647 million in unused loan commitments outstanding. Of these
        commitments, $111.585 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, 2008 the Company had $25.136 million in financial
        standby letters of credit issued and outstanding.
  32
  FIRST
        M
& F CORPORATION
 
 At
        September 30, 2008 there were $36.499 million in standby letters of credit
        issued on the Company’s behalf by a Federal Home Loan Bank (FHLB). At December
        31, 2007 there were $22.999 million of standby letters of credit issued on
        the
        Company’s behalf by a Federal Home Loan Bank. 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. At September 30, 2008 a $25.000 million FHLB letter
        of credit, representing an additional liquidity facility with an expiration
        date
        of October 31, 2008 was outstanding. The Company did not draw upon the letter
        of
        credit and subsequently renewed it for an additional 31 day period.
 
 Liabilities
        of $162 thousand at September 30, 2008 and $124 thousand at September 30,
        2007
        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
        $9.919 million at September 30, 2008. 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, 2008 mortgage origination-related
        derivatives with positive fair values of $50 thousand were included in other
        assets and derivatives with negative fair values of $10 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, 2008 the
        Company
        had $5.103 million in locked forward sales agreements in place. Forward
        sale-related derivatives with positive fair values of $28 thousand were included
        in other assets and derivatives with negative fair values of $6 thousand
        were
        included in other liabilities.
 
 Mortgages
        that are sold generally have recourse until the first payment is made. There
        were $4.777 million of sold mortgages that were still in the recourse period
        as
        of September 30, 2008. 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.
 
 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 equipment and mainframe computer systems. The
        Company
        guarantees the lease payments for its wholly-owned banking subsidiary in
        one
        data processing lease which expired in September 2008.
  33
  FIRST
        M
& F CORPORATION
 
 **Critical
        Accounting Policies**
 
 The
        preparation of the Company’s financial statements requires management to make
        certain judgments and assumptions in determining critical 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.
 
 *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 collectibility of individual loans and reflects that
        collectibility 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 loans are impaired
        and to group unimpaired 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 unimpaired loans. 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.
 
 *Goodwill,
        intangible assets and related impairments*
 
 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.
 
 Impairment
        of goodwill is recognized by a charge against earnings and is to be shown
        as a
        separate line item in the noninterest expense section of the consolidated
        statement of income.
 
 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,
        and
        (2) discount rates and earnings multiples used to determine the present value
        of
        those cash flows. Management uses a model similar to those used to evaluate
        potential mergers and acquisitions. No impairments have been recognized since
        beginning testing in 2002.
 
 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.
  34
  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.
 
 **Accounting
        Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
        standard defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement generally applies to fair value
        measurements required under other accounting pronouncements, resulting in
        a
        consistent definition of fair value across GAAP. This Statement establishes
        a
        fair value hierarchy that distinguishes between (1) market participant
        assumptions developed based on market data obtained from sources independent
        of
        the reporting entity (observable inputs) and (2) the reporting entity’s own
        assumptions about market participant assumptions developed based on the best
        information available in the circumstances (unobservable inputs). This Statement
        expands disclosures about the use of fair value to measure assets and
        liabilities in interim and annual reports. The disclosures focus on the inputs
        used to measure fair value and, for recurring fair value measurements using
        significant unobservable inputs (within Level 3 of the fair value hierarchy),
        the effect of the measurements on earnings for the period. This Statement
        is
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years. Therefore,
        the
        Statement would be effective for the Company beginning in 2008. The Company
        adopted the Statement on January 1, 2008 with no material impact on its
        financial condition or results of operations.
 
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
        No. 87, 88, 106 and 132(R).” This Statement requires employers to recognize the
        overfunded or underfunded status of a defined benefit postretirement plan
        (measured as the difference between plan assets at fair value and the benefit
        obligation) as an asset or liability in its statement of financial position
        and
        to recognize changes in that funded status in the year in which the changes
        occur through comprehensive income. This Statement also requires that defined
        benefit plan assets and obligations be measured as of a company’s year-end
        statement of financial position. This Statement also requires disclosures
        about
        certain effects on net periodic benefit cost for the next fiscal year that
        arise
        from delayed recognition of the gains and losses, prior service costs or
        credits, and transition asset or obligation. The recognition and disclosure
        requirements of this Statement are initially effective for the fiscal year
        ending after
 December
        15, 2006. The requirement to measure plan assets and obligations as of the
        date
        of the year-end statement of financial position is effective for fiscal years
        ending after December 15, 2008. The Company adopted the recognition provisions
        of this Statement on December 31, 2006. The Company expects to adopt the
        measurement date provision of this Statement in 2008. The Company does not
        expect the adoption of the measurement date provision of this Statement to
        have
        a material impact on its financial condition or results of
        operations.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities – Including an amendment of FASB
        Statement No. 115.” This Statement permits companies to measure a variety of
        financial instruments and other financial statement items with characteristics
        similar to financial instruments at fair value. The fair value option permits
        a
        company to choose to measure eligible items at fair value at specified election
        dates. Unrealized gains and losses on items for which the fair value option
        has
        been elected are to be recognized in earnings at each subsequent reporting
        date.
        The fair value option (1) may be applied instrument by instrument, with a
        few
        exceptions, such as investments otherwise accounted for by the equity method,
        (2) is irrevocable (unless a new election date occurs) and (3) is applied
        only
        to entire instruments and not to portions of instruments. The Statement is
        effective as of the beginning of an entity’s first fiscal year that begins after
        November 15, 2007. Therefore, it would become effective as of January 1,
        2008
        for the Company. Early adoption is permitted as of the beginning of a fiscal
        year on or before November 15, 2007, provided the entity also elects to apply
        the provisions of FASB Statement No. 157, “Fair Value Measurements.” SFAS No.
        159 became effective for the Company on January 1, 2008. The Company did
        not
        elect the fair value option for any financial assets or liabilities on that
        date. Therefore, the implementation of the Statement did not have a material
        impact on the Company’s financial condition or results of
        operations.
  35
  FIRST
        M
& F CORPORATION
 
 In
        June
        2007, the FASB issued Emerging Issues Task Force (EITF) Issue No. 06-11,
        “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”
EITF Issue No. 06-11 applies to share-based payment arrangements with dividend
        protection features that entitle employees to receive (a) dividends on
        equity-classified nonvested shares, (b) dividend equivalents on
        equity-classified nonvested share units, or (c) payments equal to the dividends
        paid on the underlying shares while an equity-classified share option is
        outstanding, when those dividends or dividend equivalents are charged to
        retained earnings under SFAS No. 123(R) and result in an income tax deduction
        for the employer. Consensus was reached on accounting for the tax benefits
        of
        the dividend deductions as increases to additional paid-in capital and included
        in the pool of excess benefits available to absorb tax deficiencies on
        share-based payment awards. The consensus is effective prospectively for
        dividends declared in fiscal years beginning after December 15, 2007, making
        it
        effective for the Company on January 1, 2008. The adoption of this Issue
        did not
        have a material impact on its financial condition or results of
        operations.
 
 In
        November 2007, the Securities and Exchange Commission (SEC) issued Staff
        Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair
        Value Through Earnings.” This Bulletin supersedes SAB No. 105, “Application of
        Accounting Principles to Loan Commitments” by allowing the future cash flows
        associated with servicing of a loan to be included in the measurement of
        the
        written loan commitment, which makes the accounting consistent with SFAS
        No.
        156, “Accounting for Servicing of Financial Assets” and SFAS No. 159, “The Fair
        Value Option for Financial Assets and Financial Liabilities.” This pronouncement
        is to be applied prospectively to derivative loan commitments issued or modified
        in fiscal quarters beginning after December 15, 2007. The Company adopted
        this
        Bulletin on January 1, 2008 with no material impact on its financial condition
        or results of operations.
 
 In
        December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used In
        Valuation Methods.” This Bulletin extends the use of the “simplified method” of
        determining the expected lives of stock options granted when determining
        the
        fair value of the options. The “simplified method” was allowed by SAB No. 107
        until December 31, 2007, at which time companies would be required to use
        the
        historical option exercise experience of stock-based compensation plans in
        determining the expected lives of stock option grants. This Bulletin allows
        the
        use of the simplified method beyond December 31, 2007 and is effective as
        of
        January 1, 2008. The Company adopted this Bulletin on January 1, 2008 with
        no
        material impact on its financial condition or results of
        operations.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        (SFAS) No. 141 (revised 2007), “Business Combinations.” This Statement
        establishes principles and requirements for how an acquirer (a) recognizes
        and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, and any noncontrolling interest in the acquiree, (b)
        recognizes and measures the goodwill acquired in the business combination
        or a
        gain from a bargain purchase and (c) determines what information to disclose
        to
        enable users of the financial statements to evaluate the nature and financial
        effects of the business combination. This Statement defines the acquirer
        as the
        entity that obtains control of one or more businesses in the combination.
        This
        Statement also requires that an acquirer recognize the assets acquired, the
        liabilities assumed, and any noncontrolling interest in the acquiree at the
        acquisition date, measured at their fair values as of that date. This Statement
        also requires an acquirer to recognize assets acquired and liabilities assumed
        arising from contractual contingencies as of the acquisition date, measured
        at
        their acquisition-date fair values. This Statement also requires the acquirer
        to
        recognize contingent consideration at the acquisition date, measured at its
        fair
        value at that date. This Statement applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. Early
        adoption is not allowed. The Company does not expect the adoption of this
        Statement to have a material impact on its financial condition or results
        of
        operations.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements, an amendment of ARB No. 51.” This Statement
        establishes accounting and reporting standards that require (a) the ownership
        interests in subsidiaries held by parties other than the parent be clearly
        identified, labeled, and presented in the consolidated statement of financial
        position within equity, but separate from the parent’s equity, (b) the amount of
        consolidated net income attributable to the parent and to the noncontrolling
        interest be clearly identified and presented on the face of the consolidated
        statement of income, (c) changes in a parent’s ownership interest while the
        parent retains its controlling financial interest in its subsidiary be accounted
        for consistently, (d) when a subsidiary is deconsolidated, any retained
        noncontrolling equity investment in the former subsidiary be initially measured
        at fair value and (e) entities provide sufficient disclosures that clearly
        identify and distinguish between the interests of the parent and the interests
        of the noncontrolling owners. This Statement is effective for fiscal years,
        and
        interim periods within those fiscal years, beginning on or after December
        15,
        2008. Early adoption is not allowed. The Company does not expect the adoption
        of
        this Statement to have a material impact on its financial condition or results
        of operations.
  36
  FIRST
        M
& F CORPORATION
 
 In
        March
        2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
        and Hedging Activities, an amendment of FASB Statement No. 133.” This Statement
        requires entities to provide enhanced disclosures about (a) how and why an
        entity uses derivative instruments, (b) how derivative instruments and related
        hedged items are accounted for under Statement 133 and its related
        interpretations, and (c) how derivative instruments and related hedged items
        affect an entity’s financial position, financial performance, and cash flows.
        This Statement requires (a) that objectives for using derivative instruments
        be
        disclosed in terms of underlying risk and accounting designation, (b) that
        fair
        values of derivative instruments and their gains and losses be provided in
        a
        tabular format showing the location in an entity’s financial statements of both
        derivative positions existing at period end and the effect of using derivatives
        during the reporting period, (c) that information be disclosed about
        credit-risk-related contingent features and their effect on liquidity, and
        (d)
        that cross-referencing be used within the footnotes to help users of financial
        statements locate important information about derivative instruments. This
        Statement is effective for fiscal years, and interim periods within those
        fiscal
        years, beginning on or after November 15, 2008. This Statement encourages,
        but
        does not require, comparative disclosures for earlier periods at initial
        adoption. The Company does not expect the adoption of this Statement to have
        a
        material impact on its financial condition or results of
        operations.
 
 In
        April
        2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the
        Useful Life of Intangible Assets.” This Staff Position amends factors that
        should be considered in developing renewal or extension assumptions used
        to
        determine the useful life of a recognized intangible asset under FASB Statement
        No. 142, “Goodwill and Other Intangible Assets.” This Staff Position makes the
        assumptions used to determine the useful life for renewable intangible assets
        for amortization purposes more consistent with the assumptions used to assign
        a
        fair value to the asset under FASB Statement No. 141 (revised 2007), “Business
        Combinations.” This Staff Position is effective for financial statements issued
        for fiscal years beginning after December 15, 2008, and interim periods within
        those fiscal years. The Company does not expect the adoption of this Statement
        to have a material impact on its financial condition or results of
        operations.
 
 In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles.” This Statement identifies the sources of accounting
        principles and the framework for selecting the principles to be used in the
        preparation of financial statements of nongovernmental entities that are
        presented in conformity with generally accepted accounting principles (GAAP)
        in
        the United States (the GAAP hierarchy). This Statement was issue to effectively
        move the GAAP hierarchy from the auditing standards, which are directed at
        auditors, to the accounting standards, which are directed at company
        managements. The Statement is effective 60 days following the SEC’s approval of
        the Public Company Accounting Oversight Board amendments to AU Section 411,
“The
        Meaning of Present Fairly in Conformity With Generally Accepted Accounting
        Principles.” The Company does not expect the adoption of this Statement to have
        a material impact on its financial condition or results of
        operations.
 
 In
        June
        2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether
        Instruments Granted in Share-Based Payment Transactions Are Participating
        Securities.” This Staff Position states that unvested share-based payment awards
        that contain nonforfeitable rights to dividends or dividend equivalents are
        participating securities and shall be included in the computation of earnings
        per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective
        starting on January 1, 2009 and requires that previous quarterly earnings
        per
        share be retrospectively adjusted to conform to the provisions of the FSP.
        The
        Company does not expect the adoption of this Statement to have a material
        impact
        on its financial condition or results of operations.
  37
  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 1.57% 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 1.35% increase
        in net interest income; therefore the Company’s repricing gap suggests a
        potential earnings benefit should rates increase.
 
 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 decrease by .93% with an immediate
        and sustained increase in interest rates of 200 basis points. The market
        value
        of equity will decrease by 3.19% with an immediate and sustained decrease
        in
        interest rates of 100 basis points.
 
 The
        Company had no hedging instruments in place at September 30, 2008.
 
 **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, 2008 (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, 2008 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.
  38
  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 2007 Form 10-K.
 
 **Item
        2 – Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 On
        December 12, 2007 the Board authorized a program to repurchase up to 500,000
        shares of common stock in the open market over a twelve month period beginning
        in January, 2008.
 
 The
        Company did not have any repurchases of common stock during the third quarter
        of
        2008.
 
 **Item
        3 – Defaults Upon Senior Securities**
 
 None.
 
 **Item
        4 – Submission of Matters to a Vote of Security Holders**
 
 None.
 
 **Item
        5 – Other Information**
 
 None.
 
 
 **Item
        6 – Exhibits**
 
 Exhibit
        3(A) – Articles of Incorporation, as amended. Filed as Exhibit 3 to the
        Company’s Form S-1 (File No. 33-08751) September
        15, 1986, incorporated herein by reference.
 
 Exhibit
        3(B) – By-Laws, 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.
 
 Exhibit
        10(A) – 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
 
 Exhibit
        10(B) – 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
 
 Exhibit
        11 – Computation of Earnings Per Share – See note 3 to the consolidated
        financial statements included in this report.
 
 Exhibit
        31 – Rule 13a-14(a)/15d-14(a) Certifications.
 
 Exhibit
        32 – Section 1350 Certifications.
  39
  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 7, 2008
 
 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
  40
  FIRST
        M
& F CORPORATION
 
 EXHIBIT
        INDEX
 
 3
                (A)
              Articles
                  of Incorporation, as amended. Filed as Exhibit 3 to the Company’s Form S-1
                  (File No. 33-08751) September 15, 1986, incorporated herein by
                  reference.
 
 3
                (B)
              Bylaws,
                  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.
 
 10(A)
              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(B)
              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
 
 11
              Computation
                  of Earnings Per Share – Filed herewith as note 3 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
  41