UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 FORM
10-Q
 
 x
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended March 31, 2009Or ̈
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from __________ to
  __________
 
 Commission
File Number 000-09424
 
 FIRST M&F
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 MISSISSIPPI
                    64-0636653(State
      or other jurisdiction of
                    (I.R.S.
      Employer Identification Number)Incorporation
      or organization)134 West Washington Street,  Kosciusko,
      Mississippi
                    39090(Address
      of principal executive offices)
                    (Zip
      Code)
 
 662-289-5121
 (Registrant’s
telephone number, including area code
 
 No
Change
 (Former
name, former address and former fiscal year,
 if
changed since the last report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.                        x
Yes    ̈ No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
  ̈
Yes    ̈
No
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting Company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 
 Large
      accelerated filer  ̈
                Accelerated
      filer  xNon-accelerated
      filer  ̈  (Do
      not check if a smaller reporting company)
                Smaller
      reporting company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  ̈
Yes   x No
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Common stock, $5 par value
                
                9,063,346 SharesTitle
      of Class
                
                Shares
      Outstanding at May 8,
2009
  
  FIRST
M & F CORPORATION
 
 FORM
10-Q
 
 INDEX
 
 PART
      1:
                  FINANCIAL
      INFORMATION
                  
                  PageItem
      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
                  
                  22Item
      3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  46Item
      4
                  Controls
      and Procedures
                  
                  46PART
      II:
                  OTHER
      INFORMATIONItem
      1
                  Legal
      Proceedings
                  
                  47Item
      1A
                  Risk
      Factors
                  
                  47Item
      2
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  47Item
      3
                  Defaults
      upon Senior Securities
                  
                  47Item
      4
                  Submission
      of Matters to a Vote of Security Holders
                  
                  47Item
      5
                  Other
      Information
                  
                  47Item
      6
                  Exhibits
                  
                  48SIGNATURES
                  
                  49EXHIBIT
      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)March
      31
                                
                                
                                December
      312009
                                
                                
                                2008
                                
                                
                                2008AssetsCash
      and due from banks
                                
                                $
                                35,992
                                
                                
                                $
                                52,735
                                
                                
                                $
                                47,738Interest
      bearing bank balances
                                
                                
                                14,985
                                
                                
                                
                                8,203
                                
                                
                                
                                6,556Federal
      funds sold
                                
                                
                                54,900
                                
                                
                                
                                3,800
                                
                                
                                
                                9,350Securities
      available for sale, amortized cost of $280,687, $240,473 and
      $223,882
                                
                                
                                285,752
                                
                                
                                
                                243,250
                                
                                
                                
                                227,145Loans
      held for sale
                                
                                
                                6,066
                                
                                
                                
                                6,229
                                
                                
                                
                                7,698Loans,
      net of unearned income
                                
                                
                                1,149,252
                                
                                
                                
                                1,206,168
                                
                                
                                
                                1,176,595Allowance
      for loan losses
                                
                                
                                (41,506
                                )
                                
                                
                                (14,196
                                )
                                
                                
                                (24,918
                                )Net
      loans
                                
                                
                                1,107,746
                                
                                
                                
                                1,191,972
                                
                                
                                
                                1,151,677Bank
      premises and equipment
                                
                                
                                44,827
                                
                                
                                
                                45,185
                                
                                
                                
                                44,642Accrued
      interest receivable
                                
                                
                                9,742
                                
                                
                                
                                11,289
                                
                                
                                
                                9,832Other
      real estate
                                
                                
                                10,907
                                
                                
                                
                                6,927
                                
                                
                                
                                11,061Goodwill
                                
                                
                                16,772
                                
                                
                                
                                32,572
                                
                                
                                
                                32,572Other
      intangible assets
                                
                                
                                5,758
                                
                                
                                
                                7,491
                                
                                
                                
                                7,127Bank
      owned life insurance
                                
                                
                                20,640
                                
                                
                                
                                20,010
                                
                                
                                
                                20,522Other
      assets
                                
                                
                                25,310
                                
                                
                                
                                17,805
                                
                                
                                
                                20,945$
                                1,639,397
                                
                                
                                $
                                1,647,468
                                
                                
                                $
                                1,596,865Liabilities and Stockholders’
      EquityLiabilities:Noninterest-bearing
      deposits
                                
                                $
                                191,386
                                
                                
                                $
                                187,080
                                
                                
                                $
                                178,689Interest-bearing
      deposits
                                
                                
                                1,121,774
                                
                                
                                
                                1,126,495
                                
                                
                                
                                1,082,698Total
      deposits
                                
                                
                                1,313,160
                                
                                
                                
                                1,313,575
                                
                                
                                
                                1,261,387Federal
      funds purchased and repurchase agreements
                                
                                
                                8,064
                                
                                
                                
                                5,714
                                
                                
                                
                                9,728Other
      borrowings
                                
                                
                                140,524
                                
                                
                                
                                143,977
                                
                                
                                
                                151,547Junior
      subordinated debt
                                
                                
                                30,928
                                
                                
                                
                                30,928
                                
                                
                                
                                30,928Accrued
      interest payable
                                
                                
                                2,999
                                
                                
                                
                                4,979
                                
                                
                                
                                3,537Other
      liabilities
                                
                                
                                5,031
                                
                                
                                
                                4,867
                                
                                
                                
                                3,770Total
      liabilities
                                
                                
                                1,500,706
                                
                                
                                
                                1,504,040
                                
                                
                                
                                1,460,897Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Class
      B; 1,000,000 shares authorized; 30,000 shares issued
                                
                                
                                28,657
                                
                                
                                
                                -
                                
                                
                                
                                -Common
      stock of $5.00 par value; 15,000,000 shares authorized: 9,063,346,
      9,060,080 and 9,063,346 shares issued
                                
                                
                                45,317
                                
                                
                                
                                45,300
                                
                                
                                
                                45,317Additional
      paid-in capital
                                
                                
                                31,842
                                
                                
                                
                                30,399
                                
                                
                                
                                30,447Nonvested
      restricted stock awards
                                
                                
                                788
                                
                                
                                
                                709
                                
                                
                                
                                780Retained
      earnings
                                
                                
                                31,548
                                
                                
                                
                                66,341
                                
                                
                                
                                60,133Accumulated
      other comprehensive income (loss)
                                
                                
                                538
                                
                                
                                
                                661
                                
                                
                                
                                (727
                                )Total
      Company equity
                                
                                
                                138,690
                                
                                
                                
                                143,410
                                
                                
                                
                                135,950Noncontrolling
      interest in subsidiaries
                                
                                
                                1
                                
                                
                                
                                18
                                
                                
                                
                                18Total
      equity
                                
                                
                                138,691
                                
                                
                                
                                143,428
                                
                                
                                
                                135,968$
                                1,639,397
                                
                                
                                $
                                1,647,468
                                
                                
                                $
                                1,596,865
 
 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 EndedMarch
      312009
                              
                              
                              2008Interest
      income:Interest
      and fees on loans
                              
                              $
                              17,273
                              
                              
                              $
                              22,155Interest
      on loans held for sale
                              
                              
                              79
                              
                              
                              
                              97Taxable
      investments
                              
                              
                              2,316
                              
                              
                              
                              2,357Tax-exempt
      investments
                              
                              
                              562
                              
                              
                              
                              507Federal
      funds sold
                              
                              
                              25
                              
                              
                              
                              88Interest
      bearing bank balances
                              
                              
                              6
                              
                              
                              
                              77Total
      interest income
                              
                              
                              20,261
                              
                              
                              
                              25,281Interest
      expense:Deposits
                              
                              
                              6,385
                              
                              
                              
                              9,721Federal
      funds purchased and repurchase agreements
                              
                              
                              33
                              
                              
                              
                              60Other
      borrowings
                              
                              
                              1,503
                              
                              
                              
                              1,876Junior
      subordinated debt
                              
                              
                              496
                              
                              
                              
                              497Total
      interest expense
                              
                              
                              8,417
                              
                              
                              
                              12,154Net
      interest income
                              
                              
                              11,844
                              
                              
                              
                              13,127Provision
      for loan losses
                              
                              
                              19,840
                              
                              
                              
                              780Net
      interest income (expense) afterprovision
      for loan losses
                              
                              
                              (7,996
                              )
                              
                              
                              12,347Noninterest
      income:Service
      charges on deposit accounts
                              
                              
                              2,522
                              
                              
                              
                              2,793Mortgage
      banking income
                              
                              
                              368
                              
                              
                              
                              393Agency
      commission income
                              
                              
                              971
                              
                              
                              
                              1,001Trust
      and brokerage income
                              
                              
                              116
                              
                              
                              
                              138Bank
      owned life insurance income
                              
                              
                              117
                              
                              
                              
                              151Securities
      gains, net
                              
                              
                              -
                              
                              
                              
                              11Other
      income
                              
                              
                              1,094
                              
                              
                              
                              1,025Total
      noninterest income
                              
                              
                              5,188
                              
                              
                              
                              5,512Noninterest
      expenses:Salaries
      and employee benefits
                              
                              
                              7,162
                              
                              
                              
                              7,656Net
      occupancy expenses
                              
                              
                              1,108
                              
                              
                              
                              1,005Equipment
      expenses
                              
                              
                              755
                              
                              
                              
                              891Software
      and processing expenses
                              
                              
                              526
                              
                              
                              
                              431Telecommunication
      expenses
                              
                              
                              259
                              
                              
                              
                              277Marketing
      and business development expenses
                              
                              
                              372
                              
                              
                              
                              299Foreclosed
      property expenses
                              
                              
                              756
                              
                              
                              
                              89FDIC
      insurance assessments
                              
                              
                              476
                              
                              
                              
                              35Goodwill
      impairment
                              
                              
                              15,800
                              
                              
                              
                              -Intangible
      asset amortization and impairment
                              
                              
                              1,369
                              
                              
                              
                              121Other
      expenses
                              
                              
                              2,460
                              
                              
                              
                              2,550Total
      noninterest expenses
                              
                              
                              31,043
                              
                              
                              
                              13,354Income
      (loss) before income taxes
                              
                              
                              (33,851
                              )
                              
                              
                              4,505Income
      tax expense (benefit)
                              
                              
                              (6,594
                              )
                              
                              
                              1,363Net
      income (loss)
                              
                              
                              (27,257
                              )
                              
                              
                              3,142Net
      income (loss) attributable to noncontrolling interests
                              
                              
                              (16
                              )
                              
                              
                              3Net
      income (loss) attributable to Company
                              
                              $
                              (27,241
                              )
                              
                              $
                              3,139Dividends
      and accretion on preferred stock
                              
                              
                              154
                              
                              
                              
                              -Net
      income (loss) applicable to common stock
                              
                              $
                              (27,395
                              )
                              
                              $
                              3,139Net
      income (loss) allocated to common shareholders
                              
                              $
                              (27,089
                              )
                              
                              $
                              3,097Earnings
      (loss) per share:Basic
                              
                              $
                              (2.99
                              )
                              
                              $
                              .34Diluted
                              
                              $
                              (2.99
                              )
                              
                              $
                              .34
 
 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 EndedMarch
      312009
                  
                  
                  2008Net
      income (loss)
                  
                  $
                  (27,257
                  )
                  
                  $
                  3,142Other
      comprehensive income:Change
      in unrealized gains on securities available for sale, net of tax of $673
      and $830 for the three months ended March 31
                  
                  
                  1,130
                  
                  
                  
                  1,395Reclassification
      adjustment for gains on securities available for sale included in net
      income, net of tax of $0 and $4 for the three months ended March
      31
                  
                  
                  -
                  
                  
                  
                  (7
                  )Defined
      benefit pension plan:Transition
      obligation amortization, net of tax of $1 and $1 for the three months
      ended March 31
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )Prior
      service cost amortization, net of tax of $3 and $3 for the three months
      ended March 31
                  
                  
                  (6
                  )
                  
                  
                  (6
                  )Actuarial
      loss amortization, net of tax of $84 and $30 for the three months ended
      March 31
                  
                  
                  142
                  
                  
                  
                  51Other
      comprehensive income
                  
                  
                  1,265
                  
                  
                  
                  1,432Total
      comprehensive income (loss)
                  
                  
                  (25,992
                  )
                  
                  
                  4,574Comprehensive
      income (loss) attributable to noncontrolling interests
                  
                  
                  (16
                  )
                  
                  
                  3Comprehensive
      income (loss) of Company
                  
                  $
                  (25,976
                  )
                  
                  $
                  4,571
 
 The
accompanying notes are an integral part of these financial
statements.
  5
  FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Consolidated
Statements of Stockholders' Equity
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
 (Dollars
      in thousands, except per share data)
                    
                    
                    Common
                    
                    
                    
                    
                    
                    AccumulatedStock
      and
                    
                    
                    
                    
                    
                    OtherPreferred
                    
                    
                    Paid-in
                    
                    
                    Retained
                    
                    
                    Comprehensive
                    
                    
                    NoncontrollingStock
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Income
      (Loss)
                    
                    
                    Interest
                    
                    
                    TotalJanuary
      1, 2008
                    
                    $
                    -
                    
                    
                    $
                    76,456
                    
                    
                    $
                    64,395
                    
                    
                    $
                    (771
                    )
                    
                    $
                    18
                    
                    
                    $
                    140,098Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,139
                    
                    
                    
                    -
                    
                    
                    
                    3
                    
                    
                    
                    3,142Cash
      dividends ($.13 per share)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,194
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,194
                    )7,500
      common shares repurchased
                    
                    
                    -
                    
                    
                    
                    (118
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (118
                    )Share-based
      compensation expense recognized
                    
                    
                    -
                    
                    
                    
                    70
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    71Net
      change
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,432
                    
                    
                    
                    -
                    
                    
                    
                    1,432Distributions
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3
                    )
                    
                    
                    (3
                    )March
      31, 2008
                    
                    $
                    -
                    
                    
                    $
                    76,408
                    
                    
                    $
                    66,341
                    
                    
                    $
                    661
                    
                    
                    $
                    18
                    
                    
                    $
                    143,428January
      1, 2009
                    
                    $
                    -
                    
                    
                    $
                    76,544
                    
                    
                    $
                    60,133
                    
                    
                    $
                    (727
                    )
                    
                    $
                    18
                    
                    
                    $
                    135,968Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (27,241
                    )
                    
                    
                    -
                    
                    
                    
                    (16
                    )
                    
                    
                    (27,257
                    )Cash
      dividends ($.13 per share)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,191
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,191
                    )Issuance
      of 30,000 shares of preferred stock
                    
                    
                    28,637
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    28,637Issuance
      of stock warrant for 513,113 shares
                    
                    
                    -
                    
                    
                    
                    1,363
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,363Dividends
      and accretion on preferred stock
                    
                    
                    20
                    
                    
                    
                    -
                    
                    
                    
                    (154
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (134
                    )Share-based
      compensation expense recognized
                    
                    
                    -
                    
                    
                    
                    13
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14Tax
      benefits on restricted stock dividends paid
                    
                    
                    -
                    
                    
                    
                    27
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    27Distributions
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )Net
      change
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,265
                    
                    
                    
                    -
                    
                    
                    
                    1,265March
      31, 2009
                    
                    $
                    28,657
                    
                    
                    $
                    77,947
                    
                    
                    $
                    31,548
                    
                    
                    $
                    538
                    
                    
                    $
                    1
                    
                    
                    $
                    138,691
  Consolidated
Statements of Stockholders' Equity
 Disaggregation
of Common Stock and Paid-in Capital
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
 (Dollars
      in thousands, except per share data)
                      
                      
                      
                      
                      
                      
                      
                      
                      NonvestedAdditional
                      
                      
                      Common
                      
                      
                      RestrictedCommon
                      
                      
                      Paid-in
                      
                      
                      Stock
                      
                      
                      StockStock
                      
                      
                      Capital
                      
                      
                      Warrants
      (1)
                      
                      
                      Awards
                      
                      
                      TotalJanuary
      1, 2008
                      
                      $
                      45,338
                      
                      
                      $
                      30,475
                      
                      
                      $
                      -
                      
                      
                      $
                      643
                      
                      
                      $
                      76,4567,500
      common shares repurchased
                      
                      
                      (38
                      )
                      
                      
                      (80
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (118
                      )Share-based
      compensation expense recognized
                      
                      
                      -
                      
                      
                      
                      4
                      
                      
                      
                      -
                      
                      
                      
                      66
                      
                      
                      
                      70March
      31, 2008
                      
                      $
                      45,300
                      
                      
                      $
                      30,399
                      
                      
                      $
                      -
                      
                      
                      $
                      709
                      
                      
                      $
                      76,408January
      1, 2009
                      
                      $
                      45,317
                      
                      
                      $
                      30,447
                      
                      
                      $
                      -
                      
                      
                      $
                      780
                      
                      
                      $
                      76,544Issuance
      of stock warrant for 513,113 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,363
                      
                      
                      
                      -
                      
                      
                      
                      1,363Share-based
      compensation expense recognized
                      
                      
                      -
                      
                      
                      
                      5
                      
                      
                      
                      -
                      
                      
                      
                      8
                      
                      
                      
                      13Tax
      benefits on restricted stock dividends paid
                      
                      
                      -
                      
                      
                      
                      27
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      27March
      31, 2009
                      
                      $
                      45,317
                      
                      
                      $
                      30,479
                      
                      
                      $
                      1,363
                      
                      
                      $
                      788
                      
                      
                      $
                      77,947
 (1)
Included in Additional paid-in capital in Consolidated Statements of
Condition
 
 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)
                        
                        Three
      Months Ended March 312009
                        
                        
                        2008Cash
      flows from operating activities:Net
      income (loss)
                        
                        $
                        (27,257
                        )
                        
                        $
                        3,142Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Share-based
      compensation
                        
                        
                        14
                        
                        
                        
                        71Amortization
      of pension costs
                        
                        
                        219
                        
                        
                        
                        30Depreciation
      and amortization
                        
                        
                        800
                        
                        
                        
                        851Goodwill
      impairment
                        
                        
                        15,800
                        
                        
                        
                        -Intangible
      asset impairments
                        
                        
                        1,248
                        
                        
                        
                        -Provision
      for loan losses
                        
                        
                        19,840
                        
                        
                        
                        780Net
      investment amortization (accretion)
                        
                        
                        58
                        
                        
                        
                        (50
                        )Net
      change in unearned fees/deferred costs on loans
                        
                        
                        (68
                        )
                        
                        
                        (210
                        )Capitalized
      dividends on FHLB stock
                        
                        
                        (10
                        )
                        
                        
                        (101
                        )Net
      accretion of discount on time deposits
                        
                        
                        2
                        
                        
                        
                        18Gain
      on securities available for sale
                        
                        
                        -
                        
                        
                        
                        (11
                        )Gain
      on loans held for sale
                        
                        
                        (73
                        )
                        
                        
                        (29
                        )Other
      asset sales (gains) losses
                        
                        
                        464
                        
                        
                        
                        (8
                        )Deferred
      income taxes
                        
                        
                        (7,145
                        )
                        
                        
                        (71
                        )(Increase)
      decrease in:Accrued
      interest receivable
                        
                        
                        90
                        
                        
                        
                        1,145Cash
      surrender value of bank owned life insurance
                        
                        
                        (117
                        )
                        
                        
                        (151
                        )Loans
      held for sale
                        
                        
                        1,690
                        
                        
                        
                        (626
                        )Other
      assets
                        
                        
                        1,869
                        
                        
                        
                        1,222Increase
      (decrease) in:Accrued
      interest payable
                        
                        
                        (538
                        )
                        
                        
                        (172
                        )Other
      liabilities
                        
                        
                        1,161
                        
                        
                        
                        1,973Net
      cash provided by operating activities
                        
                        
                        8,047
                        
                        
                        
                        7,803Cash
      flows from investing activities:Purchases
      of securities available for sale
                        
                        
                        (72,495
                        )
                        
                        
                        (48,289
                        )Sales
      of securities available for sale
                        
                        
                        1,665
                        
                        
                        
                        2,228Maturities
      of securities available for sale
                        
                        
                        13,967
                        
                        
                        
                        42,224Net
      (increase) decrease in:Interest
      bearing bank balances
                        
                        
                        (8,429
                        )
                        
                        
                        (4,723
                        )Federal
      funds sold
                        
                        
                        (45,550
                        )
                        
                        
                        (1,800
                        )Loans
                        
                        
                        19,363
                        
                        
                        
                        11,356Bank
      premises and equipment
                        
                        
                        (850
                        )
                        
                        
                        (356
                        )Purchases
      of bank owned life insurance
                        
                        
                        (1
                        )
                        
                        
                        (30
                        )Proceeds
      from sales of other real estate and other repossessed
    assets
                        
                        
                        4,393
                        
                        
                        
                        584Net
      redemptions of FHLB stock
                        
                        
                        225
                        
                        
                        
                        1,008Net
      cash provided by (used in) investing activities
                        
                        
                        (87,712
                        )
                        
                        
                        2,202
 
 (Continued)
  7
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Consolidated
Statements of Cash Flows
 (Unaudited)
 (Dollars
      in thousands)
                    
                    Three
      Months Ended March 312009
                    
                    
                    2008Cash
      flows from financing activities:Net
      increase in deposits
                    
                    $
                    51,771
                    
                    
                    $
                    51,102Net
      decrease in short-term borrowings
                    
                    
                    (1,664
                    )
                    
                    
                    (3,962
                    )Proceeds
      from other borrowings
                    
                    
                    -
                    
                    
                    
                    90,500Repayments
      of other borrowings
                    
                    
                    (11,023
                    )
                    
                    
                    (147,835
                    )Earnings
      distributions to noncontrolling interests
                    
                    
                    (1
                    )
                    
                    
                    (3
                    )Common
      dividends
                    
                    
                    (1,191
                    )
                    
                    
                    (1,194
                    )Preferred
      shares and common stock warrant issued to U. S. Treasury
                    
                    
                    30,000
                    
                    
                    
                    -Common
      shares repurchased
                    
                    
                    -
                    
                    
                    
                    (118
                    )Tax
      benefits related to share-based compensation
                    
                    
                    27
                    
                    
                    
                    -Net
      cash provided by (used in) financing activities
                    
                    
                    67,919
                    
                    
                    
                    (11,510
                    )Net
      decrease in cash and due from banks
                    
                    
                    (11,746
                    )
                    
                    
                    (1,505
                    )Cash
      and due from banks at January 1
                    
                    
                    47,738
                    
                    
                    
                    54,240Cash
      and due from banks at March 31
                    
                    $
                    35,992
                    
                    
                    $
                    52,735Total
      interest paid
                    
                    $
                    8,951
                    
                    
                    $
                    12,309Total
      income taxes paid
                    
                    
                    97
                    
                    
                    
                    95Income
      tax refunds received
                    
                    
                    27
                    
                    
                    
                    -Transfers
      of loans to foreclosed property
                    
                    
                    4,756
                    
                    
                    
                    1,206U.
      S. Treasury preferred dividend accrued but unpaid
                    
                    
                    134
                    
                    
                    
                    -Accretion
      on U. S. Treasury preferred stock
                    
                    
                    20
                    
                    
                    
                    -
 
 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, 2008, 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 2008 financial
statements to be consistent with the 2009 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, 2008.
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 No. 157 in situations where the market for a financial asset
is not active was clarified by the issuance of FSP No. FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,” in October 2008. FSP No. FAS 157-3 was effective for financial
statements issued as of September 30, 2008 and thereafter. FSP No. FAS 157-3 did
not have a material impact on the methods by which the Company determines the
fair values of its financial assets. FSP No. FAS 157-2 deferred the application
of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities that are
measured at fair value on a nonrecurring basis to fiscal years beginning after
November 15, 2008. The Company adopted the provisions of SFAS No. 157 with
respect to nonfinancial assets and nonfinancial liabilities beginning on January
1, 2009.
  9
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
  Note
2:  (Continued)
 
 The
following table summarizes assets and liabilities measured at fair value on a
recurring basis as of March 31, 2009, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:
 
 Fair
      Value Measurements atMarch
      31, 2009, UsingQuotedPrices
      InActiveMarkets
                    
                    
                    SignificantAssets/Liabilities
                    
                    
                    For
                    
                    
                    Other
                    
                    
                    SignificantMeasured
      at Fair
                    
                    
                    Identical
                    
                    
                    Observable
                    
                    
                    UnobservableValue
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    Inputs(Dollars
      in thousands)
                    
                    March
      31, 2009
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)
                    
                    
                    (Level
      3)Securities
      available for sale
                    
                    $
                    285,752
                    
                    
                    $
                    -
                    
                    
                    $
                    285,752
                    
                    
                    $
                    -Mortgage
      derivative assets
                    
                    
                    10
                    
                    
                    
                    -
                    
                    
                    
                    10
                    
                    
                    
                    -Mortgage
      derivative liabilities
                    
                    
                    6
                    
                    
                    
                    -
                    
                    
                    
                    6
                    
                    
                    
                    -
 
 Securities Available for
Sale.  Securities classified as available for sale are reported
at fair value utilizing Level 2 inputs. For these securities, the Company
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. The Company owns certain
beneficial interests in collateralized debt obligations secured by community
bank trust preferred securities. These interests have an amortized cost of
$5.079 million with estimated fair values of $4.017 million. These interests do
not trade in a liquid market, and therefore, market quotes are not a reliable
indicator of their ultimate realizability. The Company utilized a discounted
cash flow model based on market yields of trust-preferred securities and
adjustments for liquidity and credit factors to determine the fair values of
these beneficial interests. The Company relied on the guidance in the Financial
Accounting Standards Board’s FSP No. EITF 99-20-1 to test the beneficial
interests for impairment purposes using discounted cash flow methodologies and
management’s determinations similar to those used for certain available-for-sale
securities accounted for under FASB Statement No. 115.
 
 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 to sell the mortgages to
investors at locked prices within a specified period of time. The Company uses
an internal valuation model with observable market data inputs consisting
primarily of dealer quotes, projected cash flows, yield curves and
credit-related adjustments. Mortgage derivative assets are included in other
assets and mortgage derivative liabilities are included in other liabilities in
the Company’s balance sheet.
 
 Gains and
losses related to mortgage derivative assets and liabilities are recorded in
mortgage banking income. The Company recorded losses of $46 thousand on mortgage
derivatives during the first quarter of 2009.
  10
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 The
following table summarizes assets and liabilities measured at fair value on a
nonrecurring basis as of March 31, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
 
 Fair
      Value Measurements atMarch
      31, 2009, UsingQuotedPrices
      inActive
                  
                  
                  Significant
                  
                  
                  
                  
                  
                  Charged
      to
                  
                  
                  TotalAssets/Liabilities
                  
                  
                  Markets
      for
                  
                  
                  Other
                  
                  
                  Significant
                  
                  
                  Allowance
                  
                  
                  ExpenseMeasured
      at Fair
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for
      Loan Losses
                  
                  
                  RecognizedValue
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars
      in thousands)
                  
                  03/31/09
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)
                  
                  
                  Current
      Period
                  
                  
                  Current
      PeriodMortgages
      held for sale
                  
                  $
                  554
                  
                  
                  $
                  -
                  
                  
                  $
                  554
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  13Impaired
      loans
                  
                  
                  69,917
                  
                  
                  
                  -
                  
                  
                  
                  69,917
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,737Loan
      foreclosures
                  
                  
                  4,618
                  
                  
                  
                  -
                  
                  
                  
                  4,618
                  
                  
                  
                  -
                  
                  
                  
                  2,109
                  
                  
                  
                  -Goodwill
                  
                  
                  16,772
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,772
                  
                  
                  
                  -
                  
                  
                  
                  15,800Intangible
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,369
 
 Mortgages Held for
Sale.  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. Changes in the valuation allowance for mortgages
held for sale are recorded in mortgage banking income. At March 31, 2009 there
were $554 thousand of mortgages held for sale for which the fair value was lower
than the cost basis. Their cost basis was $567 thousand, resulting in a
valuation allowance of $13 thousand which was charged to mortgage banking
income.
 
 Impaired
Loans.  Certain financial assets such as impaired loans are
measured by means that are similar to fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to adjustments similar to fair value adjustments in certain
circumstances, such as when there is evidence of impairment. Impaired values are
determined by discounting expected cash flows by a rate equal to the original
yield on the loan rather than by a market discount rate. However, when market
prices or dealer quotes for loans are available and can be used, then the
impaired value does meet the definition of fair value. Collateral dependent
loans, which are loans for which the repayment is expected to be provided solely
by the underlying collateral, are valued for impairment purposes by using the
fair value of the underlying collateral. Although the valuations based upon
non-market discount rates do not meet the technical definition of “fair value”
they are similar in nature. For collateral dependent loans, collateral values
are estimated using Level 2 inputs based on observable market data. During the
first quarter of 2009, certain real estate-secured impaired loans were
remeasured and reported at fair value through a specific valuation allowance
allocation of the allowance for possible loan losses based upon the fair value
of the underlying collateral. Impaired real estate-secured loans with a carrying
value of $84.654 million were reduced by specific valuation allowance
allocations totaling $14.737 million to a total reported fair value of $69.917
million based on collateral valuations utilizing Level 2 inputs. The amount of
expense recognized was charged to the provision for loan losses to create an
allowance for the loans equal to the impairment amount.
 
 Loan
Foreclosures.  During the first quarter of 2009, certain
foreclosed assets, upon initial recognition, were remeasured and reported at
fair value through a charge-off to the allowance for possible loan losses based
upon the fair value of the foreclosed asset. The fair value of a foreclosed
asset, upon initial recognition, is estimated using Level 2 inputs based on
observable market data. Foreclosed assets measured at fair value upon initial
recognition totaled $4.618 million using Level 2 valuation inputs at March 31,
2009. In connection with the measurement and initial recognition of the
foregoing foreclosed assets, the Company recognized charge-offs to the allowance
for possible loan losses totaling $2.109 million. The fair value of the
foreclosed assets was recorded in other real estate.
  11
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
2:  (Continued)
 
 Goodwill.Goodwill is tested
for impairment on an annual basis and also when there are indicators that an
impairment may have occurred. The Company evaluated its goodwill asset as of
March 31, 2009 after the stock price continued to fall from $8.46 per share at
December 31, 2008 to $6.12 per share at March 31, 2009 and as the Company
continued to accrue for sizeable losses in the real estate construction loan
portfolio. The implied fair value of goodwill was determined after valuing the
community banking unit of the Company using Level 3 inputs based primarily on
(1) historical deal prices for community banks, adjusted for bank size and
credit quality factors and (2) discounted cash flow analyses. The implied fair
value of goodwill was determined as a residual amount after allocating the
estimated value of the net assets of the community banking unit to its
identifiable recognized and unrecognized, both tangible and intangible, assets
and liabilities in a manner similar to the purchase accounting allocations
required by Statement of Financial Accounting Standards No. 141R, “Business
Combinations.” These allocations required the estimation of the fair values of
identifiable assets and liabilities, both recognized and unrecognized, primarily
using Level 3 inputs such as discounted cash flow analyses utilizing cash flow
projections, credit assumptions, and discount rate assumptions and other
adjustments that management assumes that a market participant would use. The
implied fair value of goodwill, which had a carrying value of $32.572 million,
was estimated to be $16.772 million, requiring an impairment charge of $15.800
million.
 
 Intangible
assets.  Intangible assets include a Florida banking charter
and insurance agency customer renewal lists and noncompete agreements. The
Company evaluated these assets for impairment during the first quarter of 2009.
The assets were valued using unobservable (Level 3) inputs. The banking charter
is an indefinite lived intangible asset for which the Company had recorded no
amortization expense. The insurance agency assets were being amortized over
their useful lives up until the time of the impairment test. The Company
recorded $121 thousand in amortization expense related to the insurance agency
assets during the first quarter of 2009. The banking charter was determined to
be fully impaired, with an impairment charge of $1.025 million being recorded in
intangible asset amortization and impairment during the first quarter of 2009.
The insurance agency intangible assets were also deemed to be fully impaired
with their remaining balances of $223 thousand being written off to intangible
asset amortization and impairment expense.
 
 The
following table shows a reconciliation of the beginning and ending balances for
nonfinancial assets that are measured at fair value on a nonrecurring basis
using significant unobservable (Level 3) inputs.
 
 Fair
      Value Measurements UsingSignificant
      Unobservable Inputs(Dollars
      in thousands)
                  
                  (Level
      3)Intangible
      Assets
                  
                  
                  GoodwillBeginning
      balance January 1, 2009
                  
                  $
                  1,369
                  
                  
                  $
                  32,572Amortization
      expense included in earnings
                  
                  
                  (121
                  )
                  
                  
                  -Total
      impairment expenses included in earnings
                  
                  
                  (1,248
                  )
                  
                  
                  (15,800
                  )Ending
      balance March 31, 2009
                  
                  $
                  -
                  
                  
                  $
                  16,772
  12
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
3:  Investment Securities
 
 The
following is a summary of the amortized cost and fair value of securities
available for sale at March 31, 2009 and December 31, 2008:
 
 Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  Fair(Dollars
      in thousands)
                  
                  Cost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueMarch
      31, 2009:U.S.
      Treasury securities
                  
                  $
                  507
                  
                  
                  $
                  28
                  
                  
                  $
                  -
                  
                  
                  $
                  535U.S.
      Government sponsored entities
                  
                  
                  30,311
                  
                  
                  
                  309
                  
                  
                  
                  32
                  
                  
                  
                  30,588Mortgage-backed
      investments
                  
                  
                  177,452
                  
                  
                  
                  5,313
                  
                  
                  
                  132
                  
                  
                  
                  182,633Obligations
      of states and political subdivisions
                  
                  
                  64,056
                  
                  
                  
                  1,066
                  
                  
                  
                  311
                  
                  
                  
                  64,811Other
                  
                  
                  7,728
                  
                  
                  
                  5
                  
                  
                  
                  1,126
                  
                  
                  
                  6,607Equity
      securities
                  
                  
                  633
                  
                  
                  
                  -
                  
                  
                  
                  55
                  
                  
                  
                  578$
                  280,687
                  
                  
                  $
                  6,721
                  
                  
                  $
                  1,656
                  
                  
                  $
                  285,752December
      31, 2008:U.S.
      Treasury securities
                  
                  $
                  509
                  
                  
                  $
                  34
                  
                  
                  $
                  -
                  
                  
                  $
                  543U.S.
      Government sponsored entities
                  
                  
                  8,089
                  
                  
                  
                  308
                  
                  
                  
                  -
                  
                  
                  
                  8,397Mortgage-backed
      investments
                  
                  
                  141,688
                  
                  
                  
                  3,772
                  
                  
                  
                  98
                  
                  
                  
                  145,362Obligations
      of states and political subdivisions
                  
                  
                  64,357
                  
                  
                  
                  841
                  
                  
                  
                  369
                  
                  
                  
                  64,829Other
                  
                  
                  8,712
                  
                  
                  
                  1
                  
                  
                  
                  1,216
                  
                  
                  
                  7,497Equity
      securities
                  
                  
                  527
                  
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  517$
                  223,882
                  
                  
                  $
                  4,956
                  
                  
                  $
                  1,693
                  
                  
                  $
                  227,145
 
 Fair
values are determined primarily from prices obtained from an independent,
nationally recognized pricing service. These prices include exchange quoted
prices, dealer quoted prices and prices derived from market yields published by
specialized financial database providers. Mortgage-backed securities trade in a
dealer market, and therefore the prices used are derived from dealer quotes.
Most non-rated municipal securities and certain corporate securities are not
actively traded or quoted in a dealer market. These securities are valued using
dealer provided market yields in a matrix that incorporates other factors such
as credit standing and tax status. Other securities include corporate bonds and
certain collateralized debt obligations (CDOs) of investment vehicles that hold
trust preferred securities as collateral. The CDOs are valued based on dealer
quotes, expected cash flows, discount rates for securities similar to the CDO
collateral, liquidity factors and credit quality assumptions about the
underlying financial institution trust preferred obligors.
 
 Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. Management has the
ability and intent to hold these securities until their values are recovered or
to their maturity dates. In estimating whether there are other-than-temporary
impairment losses management considers (1) the length of time and extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer and (3) the ability and intent of the Company
to retain its investment for a period of time sufficient to allow for any
anticipated recovery in cost. There are 6 collateralized debt obligations
classified as other securities that represent the majority of unrealized losses
in that category. These obligations are secured by commercial bank trust
preferred securities. The impairments have arisen due to a virtual trading halt
related to the liquidity crisis in corporate debt, as well as to the estimated
effects of the sub-prime mortgage crisis on the financial stability of financial
institution issuers of the trust preferred collateral. In December, these CDOs
were downgraded to below investment grade by Moody’s. Management has evaluated
the credit quality of each of the six obligations and has determined that the
impairments are temporary and expects that the asset-backed credit markets will
stabilize within the next 24 months. Management has evaluated these instruments
for impairment within the guidelines of FASB’s EITF 99-20 as amended by FSP No.
EITF 99-20-1 using the discounted cash flow approach prescribed, adjusted for
assumptions concerning the estimates of ultimate collectability of the
contractual cash flows, and determined that no other-than-temporary impairment
condition existed.
  13
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
3:  (Continued)
 
 Securities
with a carrying value totaling $269.887 million at March 31, 2009 and $209.310
million at December 31, 2008 were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.
 
 The
following is a summary of gains and losses on securities available for
sale:
 
 Three
      Months Ended March 31(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Gross
      realized gains
                    
                    $
                    -
                    
                    
                    $
                    11Gross
      realized losses
                    
                    
                    -
                    
                    
                    
                    -$
                    -
                    
                    
                    $
                    11
 
 Note 4:
Loans
 
 The
composition of the loan portfolio is shown in the table below:
 
 (Dollars
      in thousands)
                  
                  March
      31
                  
                  
                  December
      312009
                  
                  
                  2008
                  
                  
                  2008Commercial,
      financial and agricultural
                  
                  $
                  132,812
                  
                  
                  $
                  165,605
                  
                  
                  $
                  127,704Non-residential
      real estate
                  
                  
                  720,783
                  
                  
                  
                  737,964
                  
                  
                  
                  745,700Residential
      real estate
                  
                  
                  204,003
                  
                  
                  
                  211,205
                  
                  
                  
                  209,696Home
      equity loans
                  
                  
                  45,116
                  
                  
                  
                  45,796
                  
                  
                  
                  45,791Consumer
      loans
                  
                  
                  37,451
                  
                  
                  
                  39,478
                  
                  
                  
                  37,908Other
      loans
                  
                  
                  9,087
                  
                  
                  
                  6,120
                  
                  
                  
                  9,796Total
      loans
                  
                  $
                  1,149,252
                  
                  
                  $
                  1,206,168
                  
                  
                  $
                  1,176,595
 
 The
following table is a summary of the activity in the Allowance for Loan Losses
for the first three months of 2009 and 2008:
 
 (Dollars
      in thousands)
                  
                  Three
      Months Ended March 312009
                  
                  
                  2008Balance
      at January 1
                  
                  $
                  24,918
                  
                  
                  $
                  14,217Loans
      charged off
                  
                  
                  (3,508
                  )
                  
                  
                  (1,040
                  )Recoveries
                  
                  
                  256
                  
                  
                  
                  239Net
      charge-offs
                  
                  
                  (3,252
                  )
                  
                  
                  (801
                  )Provision
      for loan losses
                  
                  
                  19,840
                  
                  
                  
                  780Balance
      at March 31
                  
                  $
                  41,506
                  
                  
                  $
                  14,196
 
 The
provision for loan losses for the first quarter of 2009 included approximately
$15.109 million related to individual loan impairments. The magnitude of the
quarterly allowance depends upon the effect of economic and market factors on
collateral values, the state of the economies local to our customers, historical
loss patterns for different types of loans, the timing and extent of downgrades
of customer borrowings as well as other qualitative factors.
  14
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
4:  (Continued)
 
 Loans are
placed on nonaccrual status when, in management’s opinion, the borrower may be
unable to meet their payment obligations, which typically occurs when principal
or interest payments are more than 90 days past due. The following table shows
overall statistics for non-performing loans and other assets of the
Company:
 
 (Dollars in
      thousands)
                      
                      March
      31
                      
                      
                      December
      312009
                      
                      
                      2008Nonaccrual
      loans
                      
                      $
                      52,084
                      
                      
                      $
                      20,564Other
      real estate
                      
                      
                      10,907
                      
                      
                      
                      11,061Total
      non-performing assets
                      
                      $
                      62,991
                      
                      
                      $
                      31,625Past
      due 90 days or more and stillaccruing
      interest
                      
                      
                      1,409
                      
                      
                      
                      5,686Restructured
      loans (accruing)
                      
                      
                      3,664
                      
                      
                      
                      3,664
 
 Loans are
considered impaired when, based on current information and events, it is
probable the Company will be unable to collect all amounts due in accordance
with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. If a loan is impaired, a specific valuation
allowance is allocated, if necessary, so that the loan is reported net, at the
present value of estimated future cash flows using the loan’s existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Interest payments on impaired loans are typically applied to
principal unless collectability of the principal amount is reasonably assured,
in which case interest is recognized on a cash basis. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
 
 The
following table shows an impaired loan summary for the Company:
 
 (Dollars
      in thousands)
                  
                  March
      31, 2009
                  
                  
                  December
      31, 2008Balance
      of impaired loans with an allocated allowance
                  
                  $
                  87,393
                  
                  
                  $
                  60,259Balance
      of impaired loans with no allocated allowance
                  
                  $
                  50,605
                  
                  
                  $
                  38,175Total
      recorded investment in impaired loans
                  
                  $
                  137,998
                  
                  
                  $
                  98,434Amount
      of the allowance allocated to impaired loans
                  
                  $
                  27,973
                  
                  
                  $
                  13,282
 
 The
impaired loan totals consist primarily of collateral-dependent construction and
commercial real estate loans.
  15
  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, 2007
                    
                    $
                    32,572
                    
                    
                    $
                    6,292
                    
                    
                    $
                    228
                    
                    
                    $
                    67
                    
                    
                    $
                    1,025Amortization
      expense
                    
                    
                    -
                    
                    
                    
                    (107
                    )
                    
                    
                    (7
                    )
                    
                    
                    (7
                    )
                    
                    
                    -Balance
      at March 31, 2008
                    
                    $
                    32,572
                    
                    
                    $
                    6,185
                    
                    
                    $
                    221
                    
                    
                    $
                    60
                    
                    
                    $
                    1,025Balance
      at December 31, 2008
                    
                    $
                    32,572
                    
                    
                    $
                    5,865
                    
                    
                    $
                    198
                    
                    
                    $
                    39
                    
                    
                    $
                    1,025Amortization
      expense
                    
                    
                    -
                    
                    
                    
                    (107
                    )
                    
                    
                    (7
                    )
                    
                    
                    (7
                    )
                    
                    
                    -Impairment
      charge
                    
                    
                    (15,800
                    )
                    
                    
                    -
                    
                    
                    
                    (191
                    )
                    
                    
                    (32
                    )
                    
                    
                    (1,025
                    )Balance
      at March 31, 2009
                    
                    $
                    16,772
                    
                    
                    $
                    5,758
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Estimated amortization
    expenseRemainder
      of 2009
                    
                    
                    
                    
                    
                    $
                    3202010
                    
                    
                    
                    
                    
                    
                    4272011
                    
                    
                    
                    
                    
                    
                    4272012
                    
                    
                    
                    
                    
                    
                    4272013
                    
                    
                    
                    
                    
                    
                    4272014
                    
                    
                    
                    
                    
                    
                    427
 
 Goodwill
is tested for impairment annually as of the end of the fiscal year. The
impairment testing as of December 31, 2008, performed internally, showed no
impairment. A subsequent impairment test, triggered by the large first quarter
loan loss accruals and continued decline in the Company’s common share price,
was performed as of March 31, 2009. Step 1 of the test indicated that the net
assets of the community banking unit of the Company had a fair value of less
than their book value. Therefore, Step 2 was performed to determine if goodwill
was an impaired asset in the allocation of the value of the community banking
unit through the allocation of fair values to all of the identifiable assets and
liabilities, both recorded and unrecorded, of the unit. The completion of this
step resulted in the carrying value of goodwill exceeding its implied fair value
by $15.800 million. Therefore, an impairment charge to the community banking
unit’s goodwill was recorded during the first quarter of 2009.
  16
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
5:  (Continued)
 
 The
banking charter intangible asset is a Florida charter acquired in November,
2006. The significant slowdown in the economy, especially in areas with
historically heavy construction activity, throughout 2008 and into 2009 affected
the Company’s ability to grow its business in the Florida panhandle. As Florida
markets became less attractive due to their exposure to the slowdown in housing
and deteriorating conditions in the construction market, the Company observed
fewer entities desiring to enter most Florida markets. When management decided
to test the goodwill asset in March 2009, it decided to evaluate the banking
charter and the insurance agency customer lists and noncompete agreements. An
evaluation of the assets determined that the Florida banking charter was fully
impaired. Therefore, the Company charged $1.025 million to intangible asset
amortization to write off the banking charter.
 
 The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. Management determined
that the renewal values and the value of the noncompete agreements were fully
impaired. Therefore, the Company charged $191 thousand for customer renewal
lists and $32 thousand for noncompete agreements to intangible asset
amortization to fully write off the remaining balances of the
assets.
 
 Note 6:  Variable
Interest Entity and Borrowing Arrangements
 
 The
following is a summary of other borrowings at March 31, 2009 and 2008 and
December 31, 2008:
 
 (Dollars
      in thousands)
                                      
                                      March
      31
                                      
                                      
                                      December
      312009
                                      
                                      
                                      2008
                                      
                                      
                                      2008Company’s
      line of credit in the amount of $10,000,000, maturing inMay
      2009; secured by approximately 29% of the Bank’s commonstock;
      interest payable quarterly at .75% below the lender’s base
      rate
                                      
                                      $
                                      2,416
                                      
                                      
                                      $
                                      2,416
                                      
                                      
                                      $
                                      2,416Bank’s
      advances from Federal Home Loan Banks, net ofunamortized
      purchase accounting discounts of $0, $5  and $0
                                      
                                      
                                      138,108
                                      
                                      
                                      
                                      141,478
                                      
                                      
                                      
                                      149,131Other
      mortgages to third parties on other real estate
                                      
                                      
                                      -
                                      
                                      
                                      
                                      83
                                      
                                      
                                      
                                      -$
                                      140,524
                                      
                                      
                                      $
                                      143,977
                                      
                                      
                                      $
                                      151,547Company’s
      junior subordinated debentures, interest payable quarterly at
      6.44%through
      March 2011, payable quarterly at 90-day LIBOR plus 1.33%
      throughMarch
      2036; redeemable after March 2011
                                      
                                      $
                                      30,928
                                      
                                      
                                      $
                                      30,928
                                      
                                      
                                      $
                                      30,928
 
 The
Company’s correspondent line of credit contains certain restrictive covenants
related to risk-based capital ratios, allowance for loan loss as a percent of
nonperforming loans, return on assets, nonperforming loans as a percent of loans
and certain supervisory actions. The net loss for the first quarter of 2009 and
the 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 the nonperforming loan covenant. 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.
  17
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 7:  Preferred
Stock and Common Stock Warrant
 
 On
February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative
Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S.
Treasury as part of its participation in the Capital Purchase Program.
Concurrent with the issuance of the preferred stock, the Company also issued a
ten-year warrant to purchase up to 513,113 shares of the Company’s common stock
at an exercise price of $8.77 per share to the U. S. Treasury. The Company
received $30.000 million from the U. S. Treasury in exchange for the preferred
stock and common stock warrant.
 
 Cumulative
dividends on the Class B, Series A Preferred Stock will accrue on the $1,000
liquidation preference at a rate of 5% per annum for the first five years, and
at a rate of 9% per annum thereafter but will be paid only if, as, and when
declared by the Company’s Board of Directors. The Class B, Series A Preferred
Stock has no maturity date and ranks senior to the Common Stock with respect to
the payment of dividends and distributions and amounts payable upon liquidation,
dissolution and winding up of the Company. The Class B, Series A Preferred Stock
is generally non-voting.
 
 The
Company may redeem the Class B, Series A Preferred Stock in whole or in part at
$1,000 per share after May 15, 2012. Prior to this date, except as permitted
under the American Recovery and Reinvestment Act of 2009 and other agreements
with the U. S. Treasury, the Company may redeem the Class B, Series A Preferred
Stock in whole or in part at par if (1) the Company has raised aggregate gross
proceeds in one or more Qualified Equity Offerings in excess of $7.5 million,
and (2) the aggregate redemption price does not exceed the aggregate net
proceeds from such Qualified Equity Offerings. Any redemption is subject to the
consent of the Federal Reserve Bank of St. Louis, which is the Company’s primary
Federal banking regulator.
 
 Upon
issuance, the fair values of the Class B, Series A Preferred Stock and the
associated warrant were computed as if the instruments were issued on a stand
alone basis. The fair value of the preferred stock was estimated based on the
observed market values for bank preferred stock-related investments adjusted for
the estimated lack of liquidity for the sale of a new issue of preferred stock
by a small community bank. The analysis resulted in an estimated stand-alone
fair value of the Class B, Series A Preferred Stock of $13.864 million. The
Company used an options pricing model to estimate the fair value of the warrant,
resulting in a stand-alone fair value of $660 thousand. The most significant and
unobservable assumption in this valuation was volatility. The Company used an
estimated value based on a combination of the ten-year, five-year, and one-year
calculations of the trading volatility of its Common Stock, which the Company
believed would be similar to the estimate used by market participants. The
individual fair values were used to record the preferred stock and associated
warrant on a relative fair value basis, with the warrants being recorded in
Additional Paid-in Capital and the preferred stock being recorded at a discount
of approximately $1.363 million. Accretion of the discount associated with the
preferred stock is recognized as an increase to preferred stock dividends in
determining net income available to common shareholders. The discount is being
amortized over a five-year period using the effective yield method. The discount
recognized during the first quarter of 2009 was $20 thousand.
  18
 
 FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 8:  Pension
and Other Employee Benefit Plans
 
 As
discussed in Note 18 to the December 31, 2008 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 (SFAS) No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” as of December 31, 2006. The Company
adopted the measurement date provisions of SFAS No. 158 as of December 31, 2008.
The following table provides a summary of the components of the Unamortized
Pension Costs recognized in stockholders’ equity as of March 31, 2009 and
December 31, 2008:
 
 (Dollars
      in thousands)
                  
                  Balance
                  
                  
                  2009
                  
                  
                  Balance12/31/08
                  
                  
                  Amortization
                  
                  
                  03/31/09Unamortized
      transition asset
                  
                  $
                  (7
                  )
                  
                  $
                  2
                  
                  
                  $
                  (5
                  )Unamortized
      prior service cost
                  
                  
                  (99
                  )
                  
                  
                  9
                  
                  
                  
                  (90
                  )Unamortized
      actuarial loss
                  
                  
                  4,529
                  
                  
                  
                  (226
                  )
                  
                  
                  4,3034,423
                  
                  
                  
                  (215
                  )
                  
                  
                  4,208Deferred
      taxes
                  
                  
                  (1,650
                  )
                  
                  
                  80
                  
                  
                  
                  (1,570
                  )Net
      unamortized pension costs
                  
                  $
                  2,773
                  
                  
                  $
                  (135
                  )
                  
                  $
                  2,638
 
 The
following is a summary of the components of net periodic benefit costs for the
three-month periods ended March 31, 2009 and 2008:
 
 (Dollars
      in thousands)
                  
                  Three
      Months Ended
                    March
      312009
                  
                  
                  2008Service
      cost
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      cost
                  
                  
                  121
                  
                  
                  
                  115Expected
      return on plan assets
                  
                  
                  (117
                  )
                  
                  
                  (155
                  )Amortization
      of transition asset
                  
                  
                  (2
                  )
                  
                  
                  (2
                  )Amortization
      of prior service costs
                  
                  
                  (9
                  )
                  
                  
                  (9
                  )Recognized
      actuarial loss
                  
                  
                  226
                  
                  
                  
                  81Net
      pension cost
                  
                  $
                  219
                  
                  
                  $
                  30
 
 The
Company did not make any contributions to the pension plan during the first
quarters of 2008 and 2009. The Company has not determined the level of
contributions to make to the pension plan during 2009.
 
 The
Company made no contributions to the ESOP and $138 thousand in matching
contributions to the 401k plan during the first quarter of 2009. The Company
made $75 thousand in contributions to the ESOP and $169 thousand in matching
contributions to the 401k plan during the first quarter of 2008.
 
 The
Company has a nonqualified deferred compensation plan for certain senior
officers. Participants deferred $18 thousand of compensation and received $2
thousand in distributions during the first three months of 2009. Participants
deferred $26 thousand of compensation and received $29 thousand in distributions
during the first three months of 2008. Employee benefit expenses include credits
for earnings declines attributed to the participants’ accounts of $54 thousand
for the first three months of 2009 and $7 thousand for the first three months of
2008. The plan incurred $1 thousand of expenses during the first three months of
2009 and no expenses during the first three months of 2008. Liabilities of the
plan were $360 thousand at March 31, 2009 and $439 thousand at March 31, 2008,
substantially all of which were vested.
  19
  FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note
9:  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:
 
 Three Months Ended March 312009
                  
                  
                  2008Number
                  
                  
                  Price
                  
                  
                  Number
                  
                  
                  PriceJanuary
      1
                  
                  
                  135,500
                  
                  
                  $
                  16.04
                  
                  
                  
                  128,500
                  
                  
                  $
                  16.16Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -March
      31
                  
                  
                  135,500
                  
                  
                  $
                  16.04
                  
                  
                  
                  128,500
                  
                  
                  $
                  16.16Exercisable
      at March 31, 2009
                  
                  
                  118,500
                  
                  
                  $
                  16.00Available
      for additional grant at March 31, 2009
                  
                  
                  264,500
 
 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.
 
 In August
and December 2005, in December 2006 and in December 2007 the Company issued
restricted stock awards to certain senior officers of the Company. The shares
vest in one (1) to 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 vesting
period would not prevent vesting of the shares. At March 31, 2009, there was
$882 thousand 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 December 2007, 1,500 shares
of restricted stock with a fair value of $24 thousand became fully vested and
outstanding. In August 2008, 1,766 shares of restricted stock with a fair value
of $19 thousand became fully vested and outstanding, and in December 2008, 1,500
shares of restricted stock with a fair value of $13 thousand became fully vested
and outstanding. The following table provides a summary of the restricted share
activity:
 
 Grant
      DateShares
                    
                    
                    Fair
      ValueJanuary
      1, 2008
                    
                    
                    123,516
                    
                    
                    $
                    16.89Granted
      in 2008
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      in 2008
                    
                    
                    (14,000
                    )
                    
                    
                    17.08Vested
      in 2008
                    
                    
                    (3,266
                    )
                    
                    
                    18.23December
      31, 2008
                    
                    
                    106,250
                    
                    
                    
                    16.82Forfeited
      in 2009
                    
                    
                    (8,000
                    )
                    
                    
                    16.86March
      31, 2009
                    
                    
                    98,250
                    
                    
                    $
                    16.82
  20
  FIRST M
& F CORPORATION AND SUBSIDIARY
 
 Notes to
Consolidated Financial Statements
 (Unaudited)
 
 Note 10:  Earnings
Per Share
 
 Effective
January 1, 2009, the Company adopted Financial Accounting Standards Board Staff
Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The Corporation has determined that
its outstanding non-vested restricted stock awards are participating securities.
Accordingly, effective January 1, 2009, earnings per common share are computed
using the two-class method prescribed by SFAS No. 128, “Earnings Per Share.” All
previously reported earnings per common share data has been retrospectively
adjusted to conform to the new computation method.
 
 (Dollars
      in thousands, except per share data)
                        
                        Three
      Months Ended March 312009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        (27,241
                        )
                        
                        $
                        3,139Preferred
      dividends
                        
                        
                        154
                        
                        
                        
                        -Net
      income (loss) attributable to common stock
                        
                        
                        (27,395
                        )
                        
                        
                        3,139Net
      income (loss) allocated to common stockholders:Distributed
                        
                        
                        1,178
                        
                        
                        
                        1,178Undistributed
                        
                        
                        (28,267
                        )
                        
                        
                        1,919$
                        (27,089
                        )
                        
                        $
                        3,097Weighted-average
      basic common and participating shares outstanding
                        
                        
                        9,165,507
                        
                        
                        
                        9,187,827Less:
      weighted average participating restricted shares
    outstanding
                        
                        
                        102,161
                        
                        
                        
                        123,516Weighted-average
      basic shares outstanding
                        
                        
                        9,063,346
                        
                        
                        
                        9,064,311Basic
      net income (loss) per share
                        
                        $
                        (2.99
                        )
                        
                        $
                        .34Weighted-average
      basic common and participating shares outstanding
                        
                        
                        9,165,507
                        
                        
                        
                        9,187,827Add:
      share-based options and stock warrant
                        
                        
                        -
                        
                        
                        
                        1,8369,165,507
                        
                        
                        
                        9,189,663Less:
      weighted average participating restricted shares
    outstanding
                        
                        
                        102,161
                        
                        
                        
                        123,516Weighted-average
      dilutive shares outstanding
                        
                        
                        9,063,346
                        
                        
                        
                        9,066,147Dilutive
      net income (loss) per share
                        
                        $
                        (2.99
                        )
                        
                        $
                        .34Weighted-average
      shares of potentially dilutive instruments that are not included in thedilutive
      share calculation due to anti-dilutive effect:Compensation
      plan-related stock options
                        
                        
                        135,500
                        
                        
                        
                        118,500Common
      stock warrant
                        
                        
                        188,141
                        
                        
                        
                        -
  21
 
 FIRST M
& F CORPORATION
 
 Item
2 - Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 The
following provides a narrative discussion and analysis of significant changes in
the Company’s results of operations and financial condition. This discussion
should be read in conjunction with the interim consolidated financial statements
and supplemental financial data presented elsewhere in this report.
 
 Forward
Looking Statements
 
 Certain
of the information included in this discussion contains forward looking
financial data and information that is based upon management’s belief as well as
certain assumptions made by, and information currently available to management.
Should the assumptions prove to be significantly different, actual results may
vary from those estimated, anticipated, projected or expected. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following:
 
 ·
              A
      significant weakening of the
economy.
 
 ·
              A
      collapse of real estate values or the values of other assets that may
      serve as collateral on customers’
borrowings.
 
 ·
              Adverse
      changes in interest rates that could destabilize the Company’s net
      interest margins.
 
 ·
              An
      unanticipated inflationary spike or deflationary
  decline.
 
 ·
              A
      market crash or a highly volatile
market.
 
 ·
              A
      loss of market liquidity for financial
products.
 
 ·
              Unfavorable
      judgments in ongoing litigation.
 
 ·
              Technological
      disruptions or breaches.
 
 ·
              Unanticipated
      catastrophic events or natural
disasters.
 
 ·
              Unforeseen
      new competition from outside the traditional financial services
      industry.
 
 ·
              Unanticipated
      changes in laws and regulations related to businesses that the Company is
      in or anticipates entering into or related to transactions that the
      Company engages in or anticipates engaging
in.
  22
 
 FIRST M
& F CORPORATION
 
 Financial
Summary
 
 The
Company incurred a net loss for the first quarter of 2009 of $27.241 million, or
$2.99 basic and diluted loss per share as compared to earnings of $3.139
million, or $.34 basic and diluted earnings per share for the same period in
2008 and a net loss of $4.357 million or $.48 basic and diluted loss per share
for the fourth quarter of 2008. Major factors contributing to the decrease in
year-over-year earnings were (1) an increase of $19.060 million in loan loss
accruals as compared to 2008, (2) a decrease of $56.916 million in loans
outstanding from the first quarter of 2008 to the first quarter of 2009, (3) a
net interest margin of 3.33% for the first three months of 2009 as compared to
3.66% for the first three months of 2008, (4) a goodwill impairment charge of
$15.800 million during the first quarter of 2009, and (5) additional intangible
asset impairment charges of $1.248 million.
 
 Highlights
for the first three months of 2009 and 2008 are as follows:
 
 ·
              The
      Company received $30.000 million in February 2009 from the U. S. Treasury
      for preferred stock and a stock warrant as a participant in the U. S.
      Treasury’s TARP Capital Purchase
Program
 ·
              Debit
      card revenues increased by 12.06% over the first quarter of
      2008
 ·
              The
      net interest margin decreased to 3.33% in the first quarter of 2009 from
      3.60% in the fourth quarter of 2008 and 3.66% in the first quarter of
      2008
 ·
              Loans
      held for investment decreased by $27.343 million during the first quarter
      of 2009 and by $13.267 million during the first quarter of
      2008
 ·
              Nonaccrual
      loans were 4.51% of total loans at March 31, 2009 as compared to 1.74% at
      December 31, 2008 and .78% at March 31,
2008
 ·
              Annualized
      net charge-offs were 1.13% for the first quarter of 2009 as compared to
      1.79% for the fourth quarter of 2008 and .27% for the first quarter of
      2008
 ·
              Closed
      a full-service branch in Collierville, Tennessee in February
      2009
  23
 
 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
                    
                    
                    InterestLoans
                    
                    
                    Bearing
      Deposits
                    
                    
                    Bearing
      Deposits1st
      Qtr 2008
                    
                    
                    (13,267
                    )
                    
                    
                    (4,126
                    )
                    
                    
                    55,2462nd
      Qtr 2008
                    
                    
                    (10,966
                    )
                    
                    
                    65
                    
                    
                    
                    (45,263
                    )3rd
      Qtr 2008
                    
                    
                    11,011
                    
                    
                    
                    (8,165
                    )
                    
                    
                    (8,749
                    )4thQtr
      2008
                    
                    
                    (29,618
                    )
                    
                    
                    (291
                    )
                    
                    
                    10,2151st
      Qtr 2009
                    
                    
                    (27,343
                    )
                    
                    
                    12,697
                    
                    
                    
                    39,076
 
 The
following table shows the quarterly net interest income, loan loss accruals,
non-interest income and non-interest expense amounts for the last five
quarters:
 
 (Net amount, in
thousands)
 Net
      Interest
                      
                      
                      Loan
      Loss
                      
                      
                      Non-Interest
                      
                      
                      Non-InterestIncome
                      
                      
                      Accruals
                      
                      
                      Income
                      
                      
                      Expense1st
      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
                      
                      
                      
                      13,2294th
      Qtr 2008
                      
                      
                      12,749
                      
                      
                      
                      10,684
                      
                      
                      
                      4,832
                      
                      
                      
                      14,2411st
      Qtr 2009
                      
                      
                      11,844
                      
                      
                      
                      19,840
                      
                      
                      
                      5,188
                      
                      
                      
                      31,043
 
 
 The
following table shows the components of pre-tax basic earnings (loss) per share
for the last five quarters:
 
 1st
      Qtr 2009
                    
                    
                    4th
      Qtr2008
                    
                    
                    3rd
      Qtr 2008
                    
                    
                    2nd
      Qtr 2008
                    
                    
                    1st
      Qtr 2008Net
      interest income
                    
                    $
                    1.31
                    
                    
                    $
                    1.41
                    
                    
                    $
                    1.43
                    
                    
                    $
                    1.45
                    
                    
                    $
                    1.44Loan
      loss expense
                    
                    
                    2.19
                    
                    
                    
                    1.18
                    
                    
                    
                    .24
                    
                    
                    
                    .67
                    
                    
                    
                    .09Noninterest
      income
                    
                    
                    .57
                    
                    
                    
                    .53
                    
                    
                    
                    .61
                    
                    
                    
                    .58
                    
                    
                    
                    .61Noninterest
      expense
                    
                    
                    3.42
                    
                    
                    
                    1.57
                    
                    
                    
                    1.46
                    
                    
                    
                    1.49
                    
                    
                    
                    1.47Net
      income (loss) before taxes
                    
                    
                    (3.73
                    )
                    
                    
                    (.81
                    )
                    
                    
                    .34
                    
                    
                    
                    (.13
                    )
                    
                    
                    .49
  24
 
 FIRST M
& F CORPORATION
 
 The
following table shows performance ratios for the last five
quarters:
 
 1st
      Qtr 2009
                        
                        
                        4thQtr
      2008
                        
                        
                        3rd
      Qtr 2008
                        
                        
                        2nd
      Qtr 2008
                        
                        
                        1st
      Qtr 2008Net
      interest margin
                        
                        
                        3.33
                        %
                        
                        
                        3.60
                        %
                        
                        
                        3.70
                        %
                        
                        
                        3.73
                        %
                        
                        
                        3.66
                        %Efficiency
      ratio
                        
                        
                        80.41
                        
                        
                        
                        79.29
                        
                        
                        
                        69.93
                        
                        
                        
                        71.85
                        
                        
                        
                        70.33Return
      on assets
                        
                        
                        (6.71
                        )
                        
                        
                        (1.08
                        )
                        
                        
                        .55
                        
                        
                        
                        (.12
                        )
                        
                        
                        .76Return
      on equity
                        
                        
                        (73.59
                        )
                        
                        
                        (12.27
                        )
                        
                        
                        6.27
                        
                        
                        
                        (1.30
                        )
                        
                        
                        8.87Noninterest
      income to avg. assets
                        
                        
                        1.28
                        
                        
                        
                        1.19
                        
                        
                        
                        1.37
                        
                        
                        
                        1.31
                        
                        
                        
                        1.34Noninterest
      incometo
      revenues (1)
                        
                        
                        29.81
                        
                        
                        
                        26.90
                        
                        
                        
                        29.16
                        
                        
                        
                        28.13
                        
                        
                        
                        29.03Noninterest
      expense to avg assets
                        
                        
                        7.65
                        
                        
                        
                        3.52
                        
                        
                        
                        3.29
                        
                        
                        
                        3.34
                        
                        
                        
                        3.25Salaries
      and benefits to totalnoninterest
      expense
                        
                        
                        23.07
                        
                        
                        
                        47.47
                        
                        
                        
                        54.66
                        
                        
                        
                        54.28
                        
                        
                        
                        57.33Contribution
      margin (2)
                        
                        
                        58.85
                        
                        
                        
                        62.36
                        
                        
                        
                        61.78
                        
                        
                        
                        61.00
                        
                        
                        
                        59.68Nonaccrual
      loans to loans
                        
                        
                        4.51
                        
                        
                        
                        1.74
                        
                        
                        
                        1.82
                        
                        
                        
                        .94
                        
                        
                        
                        .7890
      day past due loans to loans
                        
                        
                        .12
                        
                        
                        
                        .48
                        
                        
                        
                        .05
                        
                        
                        
                        .33
                        
                        
                        
                        .45Annualized
      net charge offs as apercent
      of average loans
                        
                        
                        1.13
                        
                        
                        
                        1.79
                        
                        
                        
                        .49
                        
                        
                        
                        .46
                        
                        
                        
                        .27
 (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)
                      
                      1st
      Qtr 2009
                      
                      
                      4th
      Qtr 2008
                      
                      
                      3rd
      Qtr 2008
                      
                      
                      2nd
      Qtr 2008
                      
                      
                      1st
      Qtr 2008Mortgage
      originations
                      
                      $
                      23,992
                      
                      
                      $
                      14,379
                      
                      
                      $
                      12,926
                      
                      
                      $
                      17,443
                      
                      
                      $
                      17,697Commissions
      from annuity sales
                      
                      
                      9
                      
                      
                      
                      11
                      
                      
                      
                      18
                      
                      
                      
                      49
                      
                      
                      
                      26Trust
      revenues
                      
                      
                      57
                      
                      
                      
                      56
                      
                      
                      
                      56
                      
                      
                      
                      86
                      
                      
                      
                      72Retail
      investment revenues
                      
                      
                      59
                      
                      
                      
                      75
                      
                      
                      
                      61
                      
                      
                      
                      112
                      
                      
                      
                      66Revenues
      per FTE employee
                      
                      
                      32
                      
                      
                      
                      33
                      
                      
                      
                      34
                      
                      
                      
                      33
                      
                      
                      
                      34Agency
      commissions per agencyFTE
      employee (1)
                      
                      
                      25
                      
                      
                      
                      23
                      
                      
                      
                      29
                      
                      
                      
                      25
                      
                      
                      
                      25
 (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:
 
 1st
      Qtr 2009
                    
                    
                    4th
      Qtr 2008
                    
                    
                    3rd
      Qtr 2008
                    
                    
                    2nd
      Qtr 2008
                    
                    
                    1st
      Qtr 2008Full-time
      equivalent employees
                    
                    
                    535
                    
                    
                    
                    543
                    
                    
                    
                    548
                    
                    
                    
                    556
                    
                    
                    
                    565Number
      of noninterest-bearingdeposit
      accounts
                    
                    
                    34,509
                    
                    
                    
                    35,112
                    
                    
                    
                    35,907
                    
                    
                    
                    36,455
                    
                    
                    
                    37,329
  25
 
 FIRST M
& F CORPORATION
 
 Net
Interest Income
 
 Net
interest income before loan loss expense for the first quarter of 2009 was
$11.844 million as compared to $13.127 million for the first quarter of 2008 and
$12.749 million for the fourth quarter of 2008. For the first quarter of 2009
compared to the same quarter of 2008: earning asset yields decreased by 133
basis points, liability costs decreased by 109 basis points, the net interest
spread decreased by 24 basis points and the net interest margin decreased by 33
basis points. For the first quarter of 2009 compared to the fourth quarter of
2008: earning asset yields decreased by 54 basis points, liability costs
decreased by 30 basis points, the net interest spread decreased by 24 basis
points and the net interest margin decreased by 27 basis points.
 
 Balance
sheet dynamics affecting the comparative net interest margins for the first
quarter of 2009 compared to 2008 include (1) a decrease of 3.96% in average
loans held for investment, (2) a decrease in average loans as a percentage of
earning assets from 81.90% in the first quarter of 2008 to 78.40% in the first
quarter of 2009, (3) an increase in average interest-bearing deposits of .84%,
(4) a decrease in average other borrowings of 12.31% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 10.89%
in 2008 to 10.95% in 2009.
 
 Balance
sheet dynamics affecting the comparative net interest margins for the first
quarter of 2009 compared to the fourth quarter of 2008 include (1) a decrease of
2.65% in average loans held for investment, (2) a decrease in average loans as a
percentage of earning assets from 82.52% in the fourth quarter of 2008 to 78.40%
in the first quarter of 2009, (3) an increase in average interest-bearing
deposits of 4.50%, (4) a decrease in average other borrowings of 9.52% and (5) a
decrease in average noninterest-bearing deposits as a percentage of total assets
from 11.05% in the fourth quarter of 2008 to 10.95% in the first quarter of
2009.
 
 Yield and
cost dynamics affecting the comparative net interest margins for the first
quarter of 2009 compared to 2008 include (1) a decrease of 134 basis points in
yields on loans held for investment and for sale, (2) a decrease of 92 basis
points in investment and short-term funds yields, (3) a decrease of 121 basis
points in costs of deposits and (4) a decrease of 28 basis points in costs of
borrowings.
 
 Yield and
cost dynamics affecting the comparative net interest margins for the first
quarter of 2009 compared to the fourth quarter of 2008 include (1) a decrease of
42 basis points in yields on loans held for investment and for sale, (2) a
decrease of 70 basis points in investment and short-term funds yields, (3) a
decrease of 33 basis points in costs of deposits and (4) an increase of 10 basis
points in costs of borrowings.
  26
 
 FIRST M
& F CORPORATION
 
 
 The
decrease in asset yields for the first quarter of 2009 as compared to the same
period in 2008 can be attributed to (1) a decrease in the prime lending rate of
400 basis points during 2008, (2) a steady decrease in short-term Treasury rates
from 3.07% in December 2007 to 1.28% in March 2008 and .03% in December 2008 and
(3) a decrease in loan activity through the second half of 2008 and into 2009.
Average loans held to maturity were $1.201 billion during the fourth quarter of
2007 and $1.213 billion during the first quarter of 2008. In contrast, average
loans held to maturity decreased from $1.197 billion during the fourth quarter
of 2008 to $1.165 billion during the first quarter of 2009. Yields on loans held
to maturity followed the prime rate trend, decreasing from 7.36% for the first
quarter of 2008 to 6.03% for the first quarter of 2009. Deposit costs decreased
to 2.30% for the first quarter of 2009 from 2.63% for the fourth quarter of 2008
and 3.51% for the first quarter of 2008. Average interest-bearing checking
accounts increased by 30.14% and average money-market deposits increased by
4.25% while average certificates of deposit decreased by 9.67% from the first
quarter of 2008 to the first quarter of 2009 as the Company successfully
implemented a strategy during 2008 to replace certificates of deposit with
premium-rate money-market and NOW accounts.
 
 Net
interest margins should be affected during the remainder of 2009 by the shape of
the yield curve, credit spreads that are being priced into the corporate
markets, and a lack of demand for commercial and consumer credit. The yield
curve spread between the 3-month and 5-year Treasuries was 42 basis points
during December 2007 and 120 basis points during March 2008. However, the
3-month to 5-year Treasury spread moved between 120 and 210 basis points
throughout the last nine months of 2008, settling at 149 basis points in
December. Although the absolute value of interest rates decreased significantly
during the last three quarters of 2008, the spreads between short-term and
medium-term Treasuries remained fairly stable. The AAA corporate bond to 3-month
Treasury spread was 242 basis points during December 2007 and had widened to 423
basis points during March 2008. This measure of credit spreads was 502 basis
points during December 2008 and was 528 basis points during March 2009, a direct
result of the tightened liquidity in the corporate debt markets and heightened
demand for Treasury securities as a safe-haven investment. The economy has
continued to weaken since 2007 with a considerable slowing in the housing and
construction sectors. 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 from 4.25% at the end of 2007 to a range of 0% to .25%
at the end of 2008. Federal legislation was passed in 2008 in the form of the
Emergency Economic Stabilization Act, which authorized the U. S. Treasury to
implement the Troubled Asset Relief Program (TARP) in an effort to remove
investments that had significant market losses and provide liquidity in their
place. The Company received $30.000 million in funding from the TARP’s Capital
Purchase Program in 2009. This liquidity should help the Company in funding
asset growth and in displacing high-cost sources of funds.
 
 Management
expects loan yields to continue to decrease over the course of 2009. 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 2009
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 and into 2009 has been the Summit
interest-bearing checking account. Balances in this product have grown from
$4.738 million at the end of 2007 to $60.784 million at December 31,
2008.
  27
 
 FIRST M
& F CORPORATION
 
 The
following table shows the components of the net interest margin for the first
quarters of 2009 and 2008 and the fourth quarters of 2008 and 2007:
 
 Yields/Costs
                  
                  
                  Yields/Costs1st
      Quarter, 2009
                  
                  
                  4th
      Quarter, 2008
                  
                  
                  1st
      Quarter, 2008
                  
                  
                  4th
      Quarter, 2007Interest
      bearing bank balances
                  
                  
                  0.16
                  %
                  
                  
                  0.56
                  %
                  
                  
                  3.15
                  %
                  
                  
                  4.18
                  %Federal
      funds sold
                  
                  
                  0.22
                  
                  
                  
                  0.78
                  
                  
                  
                  3.40
                  
                  
                  
                  4.34Taxable
      investments
                  
                  
                  4.92
                  
                  
                  
                  5.23
                  
                  
                  
                  5.03
                  
                  
                  
                  4.89Tax-exempt
      investments
                  
                  
                  6.07
                  
                  
                  
                  6.13
                  
                  
                  
                  6.24
                  
                  
                  
                  6.24Loans
      held for sale
                  
                  
                  3.56
                  
                  
                  
                  4.44
                  
                  
                  
                  5.52
                  
                  
                  
                  5.56Loans
      held for investment
                  
                  
                  6.03
                  
                  
                  
                  6.44
                  
                  
                  
                  7.36
                  
                  
                  
                  7.75Earning
      asset yield
                  
                  
                  5.63
                  
                  
                  
                  6.17
                  
                  
                  
                  6.96
                  
                  
                  
                  7.30Interest
      checking
                  
                  
                  1.37
                  
                  
                  
                  1.49
                  
                  
                  
                  1.46
                  
                  
                  
                  1.43Money
      market deposits
                  
                  
                  1.70
                  
                  
                  
                  2.25
                  
                  
                  
                  2.74
                  
                  
                  
                  2.82Savings
                  
                  
                  1.65
                  
                  
                  
                  2.02
                  
                  
                  
                  2.76
                  
                  
                  
                  2.88Certificates
      of deposit
                  
                  
                  3.04
                  
                  
                  
                  3.30
                  
                  
                  
                  4.49
                  
                  
                  
                  4.65Short-term
      borrowings
                  
                  
                  1.31
                  
                  
                  
                  2.08
                  
                  
                  
                  3.30
                  
                  
                  
                  4.41Other
      borrowings
                  
                  
                  4.60
                  
                  
                  
                  4.47
                  
                  
                  
                  4.75
                  
                  
                  
                  5.01Cost
      of interest-bearing liabilities
                  
                  
                  2.60
                  
                  
                  
                  2.90
                  
                  
                  
                  3.69
                  
                  
                  
                  3.91Net
      interest spread
                  
                  
                  3.03
                  
                  
                  
                  3.27
                  
                  
                  
                  3.27
                  
                  
                  
                  3.36Effect
      of non-interest bearing deposits
                  
                  
                  .31
                  
                  
                  
                  .35
                  
                  
                  
                  .44
                  
                  
                  
                  .50Effect
      of leverage
                  
                  
                  (.01
                  )
                  
                  
                  (.02
                  )
                  
                  
                  (.05
                  )
                  
                  
                  (.06
                  )Net
      interest margin, tax-equivalent
                  
                  
                  3.33
                  
                  
                  
                  3.60
                  
                  
                  
                  3.66
                  
                  
                  
                  3.83Less:
      Tax equivalent adjustments:Investments
                  
                  
                  .09
                  
                  
                  
                  .09
                  
                  
                  
                  .09
                  
                  
                  
                  .07Loans
                  
                  
                  .01
                  
                  
                  
                  .01
                  
                  
                  
                  .01
                  
                  
                  
                  .01Reported
      book net interest margin
                  
                  
                  3.23
                  %
                  
                  
                  3.50
                  %
                  
                  
                  3.56
                  %
                  
                  
                  3.75
                  %
 
 The
following table shows average balance sheets for the first quarters of 2009 and
2008 and the fourth quarters of 2008 and 2007:
 
 (Dollars
      in thousands)1st
      Quarter, 2009
                  
                  
                  4th
      Quarter, 2008
                  
                  
                  1st
      Quarter, 2008
                  
                  
                  4th
      Quarter, 2007Interest
      bearing bank balances
                  
                  $
                  16,195
                  
                  
                  $
                  9,086
                  
                  
                  $
                  9,893
                  
                  
                  $
                  4,616Federal
      funds sold
                  
                  
                  44,819
                  
                  
                  
                  19,568
                  
                  
                  
                  10,463
                  
                  
                  
                  3,656Taxable
      investments
                  
                  
                  191,111
                  
                  
                  
                  161,999
                  
                  
                  
                  188,424
                  
                  
                  
                  191,632Tax-exempt
      investments
                  
                  
                  59,875
                  
                  
                  
                  57,598
                  
                  
                  
                  52,139
                  
                  
                  
                  46,488Loans
      held for sale
                  
                  
                  8,987
                  
                  
                  
                  5,208
                  
                  
                  
                  7,104
                  
                  
                  
                  6,089Loans
      held for investment
                  
                  
                  1,165,086
                  
                  
                  
                  1,196,806
                  
                  
                  
                  1,213,121
                  
                  
                  
                  1,200,977Earning
      assets
                  
                  
                  1,486,073
                  
                  
                  
                  1,450,265
                  
                  
                  
                  1,481,144
                  
                  
                  
                  1,453,458Other
      assets
                  
                  
                  159,482
                  
                  
                  
                  161,179
                  
                  
                  
                  173,807
                  
                  
                  
                  172,298Total
      assets
                  
                  $
                  1,645,555
                  
                  
                  $
                  1,611,444
                  
                  
                  $
                  1,654,951
                  
                  
                  $
                  1,625,756Interest
      checking
                  
                  
                  263,716
                  
                  
                  
                  214,154
                  
                  
                  
                  202,638
                  
                  
                  
                  181,676Money
      market deposits
                  
                  
                  172,747
                  
                  
                  
                  179,120
                  
                  
                  
                  165,706
                  
                  
                  
                  137,052Savings
      deposits
                  
                  
                  114,655
                  
                  
                  
                  114,742
                  
                  
                  
                  111,973
                  
                  
                  
                  105,331Certificates
      of deposit
                  
                  
                  573,580
                  
                  
                  
                  568,279
                  
                  
                  
                  634,966
                  
                  
                  
                  621,897Short-term
      borrowings
                  
                  
                  10,163
                  
                  
                  
                  13,127
                  
                  
                  
                  7,319
                  
                  
                  
                  12,977Other
      borrowings
                  
                  
                  176,133
                  
                  
                  
                  194,655
                  
                  
                  
                  200,849
                  
                  
                  
                  227,435Interest-bearing
      liabilities
                  
                  
                  1,310,994
                  
                  
                  
                  1,284,077
                  
                  
                  
                  1,323,451
                  
                  
                  
                  1,286,368Noninterest-bearing
      deposits
                  
                  
                  180,207
                  
                  
                  
                  178,088
                  
                  
                  
                  180,161
                  
                  
                  
                  188,496Other
      liabilities
                  
                  
                  4,226
                  
                  
                  
                  7,949
                  
                  
                  
                  8,950
                  
                  
                  
                  11,436Stockholders’
      equity
                  
                  
                  150,128
                  
                  
                  
                  141,330
                  
                  
                  
                  142,389
                  
                  
                  
                  139,456Liabilities
      and stockholders’ equity
                  
                  $
                  1,645,555
                  
                  
                  $
                  1,611,444
                  
                  
                  $
                  1,654,951
                  
                  
                  $
                  1,625,756Loans
      to earning assets
                  
                  
                  78.40
                  %
                  
                  
                  82.52
                  %
                  
                  
                  81.90
                  %
                  
                  
                  82.63
                  %Loans
      to assets
                  
                  
                  70.80
                  %
                  
                  
                  74.27
                  %
                  
                  
                  73.30
                  %
                  
                  
                  73.87
                  %Earning
      assets to assets
                  
                  
                  90.31
                  %
                  
                  
                  90.00
                  %
                  
                  
                  89.50
                  %
                  
                  
                  89.40
                  %Noninterest-bearing
      deposits to assets
                  
                  
                  10.95
                  %
                  
                  
                  11.05
                  %
                  
                  
                  10.89
                  %
                  
                  
                  11.59
                  %Equity
      to assets
                  
                  
                  9.12
                  %
                  
                  
                  8.77
                  %
                  
                  
                  8.60
                  %
                  
                  
                  8.58
                  %
  28
 
 FIRST M
& F CORPORATION
  Provision
for Loan Losses
 
 The
accrual for the provision for loan losses for the first three months of 2009 was
$19.840 million as compared to $780 thousand for the first three months of 2008.
Net charge-offs were $3.252 million for the first three months of 2009 as
compared to $801 thousand for the first three months of 2008. The allowance for
loan losses as a percentage of loans was 3.61% at March 31, 2009, 2.12% at
December 31, 2008, and 1.18% at March 31, 2008.
 
 During
the course of 2008 and into 2009 the loan loss provision has been more
influenced by the effect of deteriorating real estate values on loans that are
individually reviewed for impairment. The Credit Risk Management section of this
discussion provides further details on the allowance provisioning
process.
 
 Non
Interest Income
 
 Noninterest
income, excluding securities transactions, for the first quarter of 2009 was
$5.188 million as compared to $5.501 million for the same period in 2008 and
$4.831 million in the fourth quarter of 2008. For the first quarter of 2009 as
compared to the first quarter of 2008: (1) deposit revenues decreased by $271
thousand, (2) mortgage banking revenues decreased by $25 thousand and (3) agency
commissions decreased by $30 thousand. For the first quarter of 2009 as compared
to the fourth quarter of 2008: (1) deposit revenues decreased by $406 thousand,
(2) mortgage banking revenues increased by $180 thousand and (3) agency
commissions increased by $37 thousand.
 
 The first
quarter of 2009 showed a decrease of 9.70% from the first quarter of 2008 and a
13.87% decrease from the fourth quarter of 2008 in deposit revenues. Overdraft
fee revenues, which comprise approximately 70% of deposit revenues, decreased by
16.34% from the first quarter of 2008 to the first quarter of 2009 and decreased
by 20.12% from the fourth quarter of 2008 to the first quarter of 2009. The
decline in the first quarter of 2009 from the first and fourth quarters of 2008
was due to decreased item volumes as first quarter 2009 volumes were lower than
first quarter 2008 volumes by 16.34% and lower than fourth quarter 2008 volumes
by 20.12%. 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 protection program is designed to help customers with their cash
flow needs and is not extended to individuals who are poor credit risks. Debit
card revenues increased by 12.06% from the first quarter of 2008 to the first
quarter of 2009 and increased by 3.27% from the fourth quarter of 2008 to the
first quarter of 2009.
 
 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 2009.  The following table
shows the components of service charges on deposit accounts:
 
 Three
      Months Ended(Dollars
      in thousands)
                  
                  March
      312009
                  
                  
                  2008Service
      charge revenues
                  
                  $
                  336
                  
                  
                  $
                  355Debit/ATM
      card revenues
                  
                  
                  579
                  
                  
                  
                  517Overdraft
      fee revenues
                  
                  
                  1,607
                  
                  
                  
                  1,921Service
      charges on deposit accounts
                  
                  $
                  2,522
                  
                  
                  $
                  2,793
  29
 
 FIRST M
& F CORPORATION
 
 Mortgage
banking income decreased by 6.36% from the first quarter of 2008 to the first
quarter of 2009 and increased by 95.74% from the fourth quarter of 2008 to the
first quarter of 2009. Mortgage originations increased by 35.57% from the first
quarter of 2008 to the first quarter of 2009 and increased by 66.85% from the
fourth quarter of 2008 to the first quarter of 2009. For 2008 mortgage rates hit
their peak in July at 6.63%. Mortgage rates decreased steadily from the end of
October 2008 through the first quarter of 2009. The lower rate environment
resulted in a significant increase in mortgage refinancings during the first
quarter of 2009. If the Federal Reserve continues its efforts to purchase
mortgage-backed securities then mortgage rates should remain low. However, the
housing market will need to recover with new and existing home sales returning
to normal levels for mortgage revenues to experience sustained
growth.
 
 Agency
commission income decreased by 3.00% from the first quarter of 2008 to the first
quarter of 2009 and increased by 3.96% from the fourth quarter of 2008 to the
first quarter of 2009. For the first quarter of 2009 as compared to the first
quarter of 2008, property & casualty commissions decreased by .99% while
annuity insurance commissions decreased by 64.81% and title insurance
commissions decreased by 28.85%. Insurance commission revenues are expected to
be influenced by economic activity, as consumers and businesses alike are
reducing spending.
 
 Significant
components of other income for the first quarters of 2009 and 2008 and the
fourth quarters of 2008 and 2007 are contained in the following
table:
 
 (Dollars
      in thousands)
                    
                    
                    1Q2009
                    
                    
                    
                    4Q2008
                    
                    
                    
                    1Q2008
                    
                    
                    
                    4Q2007Agency
      profit-sharing revenues
                    
                    $
                    425
                    
                    
                    $
                    18
                    
                    
                    $
                    368
                    
                    
                    $
                    32Loan
      fees
                    
                    
                    110
                    
                    
                    
                    26
                    
                    
                    
                    129
                    
                    
                    
                    102Gains
      on student loan sales
                    
                    
                    73
                    
                    
                    
                    10
                    
                    
                    
                    29
                    
                    
                    
                    14All
      other income
                    
                    
                    486
                    
                    
                    
                    468
                    
                    
                    
                    499
                    
                    
                    
                    530Total
      other income
                    
                    $
                    1,094
                    
                    
                    $
                    522
                    
                    
                    $
                    1,025
                    
                    
                    $
                    678
 
 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 29.03% in the first quarter of 2008 to 29.81% in the first
quarter of 2009, and increased from 26.90% in the fourth quarter of 2008 to
29.81% in the first quarter of 2009. Another metric that the Company monitors is
revenues per full-time employee, which were approximately $32 thousand per
employee for the first quarter of 2009 and $33 thousand per employee for the
fourth quarter of 2008 as compared to $34 thousand for the first quarter of 2008
and $34 thousand for the fourth quarter of 2007. Insurance product revenues per
producer remained fairly constant from $25 thousand per producer in the first
quarter of 2008 and $17 thousand per producer in the fourth quarter of 2007 to
$25 thousand per producer in the first quarter of 2009 and $23 thousand per
producer in the fourth 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 132.45% from the first quarter of 2008 to the first
quarter of 2009 and increased by 117.97% from the fourth quarter of 2008 to the
first quarter of 2009. Excluding goodwill and other intangible asset impairment
charges of $17.048 million in the first quarter of 2009, noninterest expenses
increased by 4.79% from the first quarter of 2008 to the first quarter of 2009
and decreased by 1.74% from the fourth quarter of 2008 to the first quarter of
2009.
 
 Salary
and benefit expenses, which comprise approximately 53% of noninterest expenses,
decreased by 6.45% from the first quarter of 2008 to the first quarter of 2009
and increased by 5.93% from the fourth quarter of 2008 to the first quarter of
2009. The linked-quarter increase was due to the reduction of bonus accruals of
approximately $300 thousand across the organization during the fourth quarter of
2008 due to the Company’s non-achievement of certain performance targets. The
number of full-time equivalent employees was 535 at March 31, 2009, 543 at
December 31, 2008, 565 at March 31, 2008, and 564 at December 31, 2007.
Foreclosed property expenses increased significantly in 2009 over 2008
commensurate with an increase in other real estate foreclosures beginning in the
second half of 2008. Foreclosed property expenses for 2009 include $530 thousand
in losses on sales of properties. FDIC insurance assessments increased
significantly over the first quarter of 2008 as (1) assessment rates for the
first quarter of 2009 were increased by 7 basis points by the FDIC over the 2008
assessment rates, (2) credits used to reduce assessments paid were fully used up
by the third quarter of 2008, and (3) amounts paid due to the special assessment
for insured deposits in excess of $250,000 in the Temporary Liquidity Guarantee
Program. Noninterest expenses as a percent of average assets increased from
3.25% in the first quarter of 2008 to 7.65% in the first quarter of 2009, and
increased from 3.52% in the fourth quarter of 2008 to 7.65% in the first quarter
of 2009. Excluding one-time goodwill and intangible asset impairment charges of
$17.048 million, noninterest expenses as a percent of average assets for the
first quarter of 2009 were 3.45%.
  30
 
 FIRST M
& F CORPORATION
 
 
 Significant
components of other expense for the first quarters of 2009 and 2008 and the
fourth quarters of 2008 and 2007 are contained in the following
table:
 
 (Dollars
      in thousands)
                  
                  
                  1Q2009
                  
                  
                  
                  4Q2008
                  
                  
                  
                  1Q2008
                  
                  
                  
                  4Q2007Postage
      and shipping
                  
                  $
                  243
                  
                  
                  $
                  232
                  
                  
                  $
                  234
                  
                  
                  $
                  243Supplies
                  
                  
                  227
                  
                  
                  
                  216
                  
                  
                  
                  259
                  
                  
                  
                  274Legal
      expenses
                  
                  
                  137
                  
                  
                  
                  281
                  
                  
                  
                  165
                  
                  
                  
                  (129
                  )Other
      professional expenses
                  
                  
                  126
                  
                  
                  
                  335
                  
                  
                  
                  194
                  
                  
                  
                  125Insurance
      expenses
                  
                  
                  223
                  
                  
                  
                  225
                  
                  
                  
                  237
                  
                  
                  
                  248Debit
      card processing expenses
                  
                  
                  182
                  
                  
                  
                  176
                  
                  
                  
                  160
                  
                  
                  
                  149All
      other expenses
                  
                  
                  1,322
                  
                  
                  
                  1,486
                  
                  
                  
                  1,301
                  
                  
                  
                  1,177Total
      other expense
                  
                  $
                  2,460
                  
                  
                  $
                  2,951
                  
                  
                  $
                  2,550
                  
                  
                  $
                  2,087
 
 Goodwill
Impairment
 
 Goodwill
is tested for impairment on an annual basis and also when there are indicators
that an impairment may have occurred. There was no impairment recognized as a
result of the goodwill impairment tests performed by the Company through 2008.
An additional impairment test was performed at the end of November 2008 due to
the considerable credit problems encountered and because the stock price, and
therefore the market value of the company, had decreased by 47.34%. The tested
community banking unit, with lower intermediate-term cash flow projections than
it had one year ago, did have a calculated fair value that was less than its
book value. The fair value calculation was based on a discounted cash flow
analysis that assumed continued credit loss expectations through 2009, a
projection of noninterest revenues and expenses based on historical growth and
future market expectations and a projection of net interest income starting at
the current margins with expectations for future decreases in the margins and
increases in loan volumes. A minimum tangible capital ratio was required to be
maintained as well. A terminal value was determined using a standard multiple of
earnings and a market discount rate was applied to the series of cash flows to
arrive at a fair value. The book value in excess of fair value implied that the
net assets of the community banking unit were impaired. The second step of the
goodwill calculation was performed to assign fair values to the identifiable
assets and liabilities of the community banking unit to determine if the
goodwill asset, which would be a residual, was worth at least as much as its
carrying value. In the marking of community banking assets to market for the
impairment test, the loan portfolio absorbed the majority of the valuation
decreases from a year ago. The loan portfolio had suffered from credit
deterioration during 2008 and observations of the Company’s current markets
indicated that more deterioration could be expected. The loan portfolio was
valued using assumptions concerning the recoverability of the nonaccrual loans
that were currently identified. The remaining unadjusted loan portfolio cash
flows were discounted using credit spreads observable in the corporate bond
market. This analysis resulted in a much lower fair value being assigned to the
loan portfolio than its carrying value. Management concluded that the community
banking unit’s impairment was primarily due to impairment in the loan portfolio
and not in the goodwill asset. Therefore, no goodwill impairment was recorded
when the fair value of the community banking unit was allocated to all assets
and liabilities, leaving the original community banking unit goodwill intact. As
a result, no goodwill impairment was recognized from the November
test.
 
 In the
fourth quarter of 2008 loan loss accruals of $10.684 million were recorded for
loan impairments, confirming the decrease in net realizable loans that was
implied in the November goodwill impairment testing. The Company performed a
subsequent goodwill impairment test as of December 31, 2008 with no goodwill
impairment indicated. The fair value of the community banking unit was valued
using a discounted cash flow analysis. Earnings were expected to be positive for
2009, with approximately $12.000 million in loan losses, and subsequently
returning to normal over time and achieving a 1.00% return on assets in the
fourth year of the five-year projection. Low loan growth was expected with no
improvement in the net interest margins. The same discount rate and multiple of
earnings terminal value were used from the November test. Even though the first
step test of the community banking unit resulted in an estimated fair value in
excess of its carrying value, a valuation of the loan portfolio was performed to
determine if there was still a significant difference between its fair value and
book value. This valuation confirmed that the loan portfolio had a fair value of
approximately $65 million less than its gross (before being reduced by the
allowance for loan losses) balance as disclosed in Note 20 concerning fair
value, in the Company’s December 31, 2008 financial statements. Therefore, if
the fair value of the community banking unit had been less than its book value,
the impairment would have been primarily in the loan portfolio and not in the
goodwill asset.
  31
 
 FIRST M
& F CORPORATION
 
 The
Company evaluated its goodwill asset as of March 31, 2009 after the stock price
continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share
at March 31, 2009 and as the Company continued to accrue for sizeable losses in
the real estate construction loan portfolio, resulting in unexpected first
quarter net losses. The Company determined that another impairment test of the
community banking unit’s goodwill was needed. A significant change to the
analysis was also made by redefining the community banking unit as the
consolidated company, therefore including funding sources and investments that
had previously been allocated to the treasury unit. This was done since (1) the
treasury area was used by the community banking operations more than any other
part of the organization and (2) funding sources such as debentures that were
issued in a trust preferred transaction were obtained to benefit the bank’s
capital position. The implied fair value of goodwill was determined after
valuing the community banking unit of the Company using primarily Level 3 inputs
based primarily on historical deal prices for community banks, adjusted for bank
size and credit quality factors. This resulted in a fair value of the community
banking unit that was less than the book value by approximately $17 million. The
December test, based on discounted cash flow analysis, had resulted in a fair
value in excess of book value by approximately $6 million. Therefore, the net
assets of the community banking unit were assumed to be impaired and a second
step of assigning individual fair values to identified assets and liabilities
was performed to determine if the goodwill asset was impaired. After fair values
were assigned to the identifiable assets and liabilities, the residual amount
that was assigned to goodwill, its implied fair value, was approximately $15.800
million less than its book value. In comparing the fair value allocations in the
March test to the December and November tests, the primary differences were (1)
a lower fair value estimate for the community banking unit based on the
valuation using observable merger transaction prices, (2) the deterioration in
the fair value of the trust preferred-related debentures, and (3) a leveling out
of the loan portfolio deterioration implied in the valuations. The implied fair
value of goodwill was estimated to be $16.772 million, requiring an impairment
charge of $15.800 million.
 
 Intangible
asset impairments
 
 The
banking charter intangible asset is a Florida charter acquired in November,
2006. The significant slowdown in the economy, especially in areas with
historically heavy construction activity, throughout 2008 and into 2009 affected
the Company’s ability to grow its business in the Florida panhandle. As Florida
markets became less attractive due to their exposure to the slowdown in housing
and deteriorating conditions in the construction market, the Company observed
fewer entities desiring to enter most Florida markets. When management decided
to test the goodwill asset in March 2009, it decided to evaluate the banking
charter and the insurance agency customer lists and noncompete agreements.
Management determined that the Florida banking charter was fully impaired.
Therefore, the Company charged $1.025 million to intangible asset amortization
to write off the banking charter.
 
 The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. The majority of the
customer renewal assets were acquired in merger transactions that occurred
between 1998 and 2001. Management determined that the renewal values and the
value of the noncompete agreements were fully impaired. Therefore, the Company
charged $191 thousand for customer renewal lists and $32 thousand for noncompete
agreements to intangible asset amortization to fully write off the remaining
balances of the assets.
  32
  FIRST M
& F CORPORATION
 
 Income
Taxes
 
 Due to a
significant addition to the provision for loan losses, a non-tax deductible
goodwill impairment charge and other intangible asset impairments the Company
incurred pre-tax losses and accrued an income tax benefit for the first quarter
of 2009. The $6.594 million tax benefit for 2009 includes a deferred tax benefit
of $7.145 million and a current tax expense of $551 thousand. The Company
expects to utilize the tax benefits in the foreseeable future as losses are
realized through loan charge-offs and collateral foreclosures and dispositions.
The following table shows the earnings and tax effect of the loan loss accrual
and the primarily non-tax deductible goodwill and other impairment charges
separate from the remaining income statement items on 2009’s financial
results:
 
 IntangibleAsset
      andBefore
                        
                        
                        Goodwill
                        
                        
                        Loan
      LossImpairments
      and
                        
                        
                        Impairment
                        
                        
                        Accrual
                        
                        
                        Earnings
      as(Dollars in thousands)
                        
                        Loan
      Loss Accrual
                        
                        
                        Effect
                        
                        
                        Effect
                        
                        
                        DisclosedNet
      income (loss) before tax
                        
                        $
                        3,037
                        
                        
                        $
                        (17,048
                        )
                        
                        $
                        (19,840
                        )
                        
                        $
                        (33,851
                        )Income
      taxes
                        
                        
                        890
                        
                        
                        
                        (84
                        )
                        
                        
                        (7,400
                        )
                        
                        
                        (6,594
                        )Net
      income (loss) beforenoncontrolling
      interests
                        
                        $
                        2,147
                        
                        
                        $
                        (16,964
                        )
                        
                        $
                        (12,440
                        )
                        
                        $
                        (27,257
                        )Effective
      tax rate beforenoncontrolling
      interests
                        
                        
                        29.31
                        %
                        
                        
                        .49
                        %
                        
                        
                        37.30
                        %
                        
                        
                        19.48
                        %
 
 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 March 31, 2008 or 2009 and therefore
did not have any tax accruals in the first quarters of 2008 or 2009 related to
uncertain positions.
 
 Assets
and Liabilities
 
 Assets
decreased by .49% from March 31, 2008 to March 31, 2009, and increased by 2.66%
from December 31, 2008. Investments increased by 17.47% from March 31, 2008 to
March 31, 2009, and increased by 25.80% from December 31, 2008. The Company
purchased $23.230 million in government agency securities and $46.809 million in
mortgage-backed and related securities during the first quarter of 2009.
Liquidity from deposit growth, a reduction in the loan portfolio and funds
received through the U. S. Treasury CPP program was used to fund the purchases.
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. Real
estate-related loans decreased during the first quarter of 2009 as the Company
sought to remove problem real estate loans and diversify into other areas.
Commercial loans grew during the first quarter while consumer loans remained
steady. The Company began the process of diversifying the product mix of the
loan portfolio during the first quarter by de-emphasizing commercial and
residential construction loans. A renewed emphasis is being made on consumer and
small business commercial loans. Loans held to maturity decreased by 4.72% from
March 31, 2008 to March 31, 2009, and decreased by 2.32% from December 31, 2008.
Management expects that the loan portfolio’s growth will depend on the volume of
real estate-related and other problem loans that are moved out of the portfolio
as well as the strength of the economy as it relates to consumer and commercial
loans. Loans as a percent of total assets were 70.10% at March 31, 2009, 73.68%
at December 31, 2008, and 73.21% at March 31, 2008.
  33
 
 FIRST M
& F CORPORATION
 
 The
following table shows loans held for investment by type as of March 31, 2009,
December 31, 2008, and March 31, 2008:
 
 (Dollars
      in thousands)
                      
                      March
      31, 2009
                      
                      
                      December
      31, 2008
                      
                      
                      March
      31, 2008Commercial
      real estate
                      
                      $
                      720,783
                      
                      
                      $
                      745,700
                      
                      
                      $
                      737,964Residential
      real estate
                      
                      
                      204,003
                      
                      
                      
                      209,696
                      
                      
                      
                      211,205Home
      equity lines
                      
                      
                      45,116
                      
                      
                      
                      45,791
                      
                      
                      
                      45,796Commercial,
      financial and agricultural
                      
                      
                      132,812
                      
                      
                      
                      127,704
                      
                      
                      
                      165,605Consumer
                      
                      
                      37,451
                      
                      
                      
                      37,908
                      
                      
                      
                      39,478Other
      loans
                      
                      
                      9,087
                      
                      
                      
                      9,796
                      
                      
                      
                      6,120Total
                      
                      $
                      1,149,252
                      
                      
                      $
                      1,176,595
                      
                      
                      $
                      1,206,168Mortgages
      held for sale
                      
                      $
                      4,443
                      
                      
                      $
                      3,802
                      
                      
                      $
                      2,011Student
      loans held for sale
                      
                      
                      1,623
                      
                      
                      
                      3,895
                      
                      
                      
                      4,218
 
 Deposits
decreased by .03% from March 31, 2008 to March 31, 2009, and increased by 4.10%
from December 31, 2008. The following table shows the breakdown by deposit
category of core deposits and public funds deposits growth from December 31,
2008 to March 31, 2009:
 
 Core
      Customers
                  
                  
                  Public
      Funds
                  
                  
                  Total
      Deposits(Dollars
      in thousands)
                  
                  Increase
      (Decrease)
                  
                  
                  Increase
      (Decrease)
                  
                  
                  Increase
      (Decrease)Amt.
                  
                  
                  Pct.
                  
                  
                  Amt.
                  
                  
                  Pct.
                  
                  
                  Amt.
                  
                  
                  Pct.Noninterest-bearing
                  
                  $
                  8,254
                  
                  
                  
                  4.81
                  %
                  
                  $
                  4,443
                  
                  
                  
                  63.79
                  %
                  
                  $
                  12,697
                  
                  
                  
                  7.11
                  %NOW
                  
                  
                  18,359
                  
                  
                  
                  10.84
                  
                  
                  
                  47,828
                  
                  
                  
                  99.60
                  
                  
                  
                  66,187
                  
                  
                  
                  30.45MMDA
                  
                  
                  (13,790
                  )
                  
                  
                  (8.68
                  )
                  
                  
                  10,739
                  
                  
                  
                  45.87
                  
                  
                  
                  (3,051
                  )
                  
                  
                  (1.67
                  )Savings
                  
                  
                  247
                  
                  
                  
                  0.22
                  
                  
                  
                  1
                  
                  
                  
                  0.21
                  
                  
                  
                  248
                  
                  
                  
                  0.22Customer
      CDs
                  
                  
                  15,788
                  
                  
                  
                  3.46
                  
                  
                  
                  (36,483
                  )
                  
                  
                  (39.12
                  )
                  
                  
                  (20,695
                  )
                  
                  
                  (3.77
                  )Brokered
      CDs
                  
                  
                  (4,122
                  )
                  
                  
                  (24.20
                  )
                  
                  
                  509
                  
                  
                  
                  20.65
                  
                  
                  
                  (3,613
                  )
                  
                  
                  (18.53
                  )Total
                  
                  $
                  24,736
                  
                  
                  
                  2.28
                  %
                  
                  $
                  27,037
                  
                  
                  
                  15.49
                  %
                  
                  $
                  51,773
                  
                  
                  
                  4.10
                  %
 
 Interest-bearing
checking and certificate of deposit core customer deposits were up during the
first quarter of 2009. Interest-bearing checking deposits grew by $47.828
million during the first quarter of 2009 from non-core sources such as
municipalities. The interest-bearing Summit Checking account continued to be the
sales leader for deposit products into 2009. 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 $15.467 million during the first
quarter of 2009. Certificates of deposit decreased during the first quarter of
2009 as the interest-bearing checking and money market accounts were used
instead of time deposits to attract funding. The Company de-emphasized
certificates of deposit during 2008, 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 enhanced its core checking account
products and introduced a variety of add-ons designed to improve 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. 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.
  34
  FIRST M
& F CORPORATION
 
 The
following table shows the deposit mix as of March 31, 2009, December 31, 2008,
and March 31, 2008:
 
 (Dollars
      in thousands)
                  
                  March
      31, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  March
      31, 2008Noninterest-bearing
      demand
                  
                  $
                  191,386
                  
                  
                  $
                  178,689
                  
                  
                  $
                  187,080NOW
      deposits
                  
                  
                  283,521
                  
                  
                  
                  217,334
                  
                  
                  
                  210,295Money
      market deposits
                  
                  
                  179,313
                  
                  
                  
                  182,364
                  
                  
                  
                  182,824Savings
      deposits
                  
                  
                  114,529
                  
                  
                  
                  114,281
                  
                  
                  
                  117,532Certificates
      of deposit
                  
                  
                  528,529
                  
                  
                  
                  549,224
                  
                  
                  
                  588,925Brokered
      certificates of deposit
                  
                  
                  15,882
                  
                  
                  
                  19,495
                  
                  
                  
                  26,919Total
                  
                  $
                  1,313,160
                  
                  
                  $
                  1,261,387
                  
                  
                  $
                  1,313,575
 
 The
following table shows the mix of public funds deposits as of March 31, 2009,
December 31, 2008, and March 31, 2008:
 
 (Dollars
      in thousands)
                  
                  March
      31, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  March
      31, 2008Noninterest-bearing
      demand
                  
                  $
                  11,408
                  
                  
                  $
                  6,965
                  
                  
                  $
                  6,138NOW
      deposits
                  
                  
                  95,847
                  
                  
                  
                  48,019
                  
                  
                  
                  63,245Money
      market deposits
                  
                  
                  34,150
                  
                  
                  
                  23,411
                  
                  
                  
                  27,962Savings
      deposits
                  
                  
                  470
                  
                  
                  
                  469
                  
                  
                  
                  345Certificates
      of deposit
                  
                  
                  56,782
                  
                  
                  
                  93,265
                  
                  
                  
                  109,044Brokered
      certificates of deposit
                  
                  
                  2,974
                  
                  
                  
                  2,465
                  
                  
                  
                  1,369Total
                  
                  $
                  201,631
                  
                  
                  $
                  174,594
                  
                  
                  $
                  208,103
 
 Other
borrowings decreased by $3.453 million from March 31, 2008 to March 31, 2009 and
by $11.023 million from December 31, 2008. The decreases in borrowings were
primarily funded through liquidity provided by deposit growth and loan portfolio
paydowns. Amounts of borrowings maturing within one year increased from 33.18%
of other borrowings at December 31, 2008 to 49.89% at March 31, 2009. 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.
  35
 
 FIRST M
& F CORPORATION
 
 Equity
 
 The
Company’s and Bank’s regulatory capital ratios at March 31, 2009, 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
                                                                                    
                                                                                    $
                                                                                    164,436
                                                                                    
                                                                                    
                                                                                    
                                                                                    12.55
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    155,834
                                                                                    
                                                                                    
                                                                                    
                                                                                    11.91
                                                                                    %Tier
      1 capital
                                                                                    
                                                                                    
                                                                                    147,745
                                                                                    
                                                                                    
                                                                                    
                                                                                    11.27
                                                                                    %
                                                                                    
                                                                                    
                                                                                    139,169
                                                                                    
                                                                                    
                                                                                    
                                                                                    10.64
                                                                                    %Leverage
                                                                                    
                                                                                    
                                                                                    147,745
                                                                                    
                                                                                    
                                                                                    
                                                                                    9.09
                                                                                    %
                                                                                    
                                                                                    
                                                                                    139,169
                                                                                    
                                                                                    
                                                                                    
                                                                                    8.58
                                                                                    %For
      Capital Adequacy Purposes:Total
      risk-based capital
                                                                                    
                                                                                    104,835
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    8.00
                                                                                    %
                                                                                    
                                                                                    104,667
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    8.00
                                                                                    %Tier
      1 capital
                                                                                    
                                                                                    52,418
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    4.00
                                                                                    %
                                                                                    
                                                                                    52,333
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    4.00
                                                                                    %Leverage
                                                                                    
                                                                                    65,012
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    4.00
                                                                                    %
                                                                                    
                                                                                    64,879
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    4.00
                                                                                    %To
      Be Well Capitalized Under PromptCorrective
      Action Provisions:Total
      capital
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    130,833
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    10.00
                                                                                    %Tier
      1 capital
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    78,500
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    6.00
                                                                                    %Leverage
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    81,099
                                                                                    ≥
                                                                                    
                                                                                    
                                                                                    5.00
                                                                                    %
 
 The
Company repurchased 7,500 shares during the first three months of 2008 at an
average price of $15.55 per share. The Company did not repurchase any shares
during the first three months of 2009. The Company did not issue any shares upon
the exercise of stock options during the first three months of 2008 or 2009. As
disclosed in Note 7 to the financial statements, the Company issued 30,000
shares of Class B, Series A Preferred Stock and a warrant for 513,113 shares of
common stock with an exercise price of $8.77 on February 27, 2009 to the U. S.
Treasury under the provisions of the TARP Capital Purchase Program for total
proceeds of $30.000 million. Approximately $28.637 million of the proceeds were
allocated to the preferred stock with the remaining $1.363 million being
allocated to additional paid-in capital for the common stock warrant. The
preferred stock will be treated as tier 1 capital for risk-based capital
measurement purposes. The Company was approved for up to $40.000 million in the
Capital Purchase Program during the fourth quarter of 2008. Management decided
to request $30.000 million of the approved amount for several reasons: (1) the
economy has experienced significant deterioration since the beginning of 2008,
(2) there is much uncertainty regarding the timing and extent of the next
economic recovery and (3) the economic uncertainty calls for prudence when
projecting the path of real estate values for illiquid and depressed markets.
Management believes that the Capital Purchase Program proceeds will serve as
excellent insurance against the effects of further economic deterioration on the
Company’s capital and will also serve as a source of liquidity when prudent
lending opportunities arise.
 
 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 stock price was listed at
$6.12 on March 31, 2009.
  36
 
 FIRST M
& F CORPORATION
 
 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 March 31, 2009, 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.
 
 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, those for which the repayment is expected to be
provided solely by the underlying collateral, impairment is based on the value
of the related collateral. Otherwise, impairment is based on the estimated
present value of expected cash flows discounted at the effective interest rate
of the loan. The material estimates necessary in this process make it inherently
subjective and make the estimates subject to significant changes and may add
volatility to earnings as provisions are adjusted. Loans not individually tested
for impairment are grouped into risk-rated pools and evaluated based on
historical loss experience. Additionally management considers specific external
credit risk factors (“environmental factors”) that may not be reflected in
historical loss rates such as: (1) a potential for a slow-down in the real
estate market and its effect on real estate concentrations; (2) 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 are reviewed on a quarterly
basis.
  37
 
 FIRST M
& F CORPORATION
 
 The
Company has experienced stress in the construction and land development
portfolio as well as in its commercial real estate-secured portfolio. The
Company experienced a large increase in the amount of past due and non-accrual
real estate-secured construction and commercial loans during 2008. This trend
has continued into 2009. Many of these loans, as a result of internal and
external loan reviews, have been classified as watch loans and in many cases
significantly downgraded for the Company’s internal credit monitoring systems.
Many of the construction-related borrowers are without cash and cannot market
properties due to the lack of qualified, interested buyers. When construction
borrowers cannot meet their obligations the Company is required to recognize
losses due to the loss of value of the underlying collateral properties by
adding to the allowance for loan losses through additional provisions. The
provision for the first quarter of 2009 was $19.840 million as compared to $780
thousand for the first quarter of 2008 and $10.684 million for the fourth
quarter of 2008. Management is working to find a way to create an orderly and
timely liquidation of the collateral properties with a minimum of loss to the
Company and the customer. In an effort to address and change the risk profile of
the Company’s balance sheet, management has decided to de-emphasize residential
and commercial construction loans and re-emphasize consumer and small business
loans.
 
 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.
 
 The
following table shows the trend in credit quality related to the largest
segments of the real estate loan portfolio.
 
 Past
      Due90
      Days
                  
                  
                  
                  
                  
                  Year-To-Date(Dollars
      in thousands)
                  
                  Outstanding
                  
                  
                  And
      Still
                  
                  
                  
                  
                  
                  NetBalances
                  
                  
                  Accruing
                  
                  
                  Nonaccrual
                  
                  
                  Charge-OffsConstruction
      and development loans:03/31/09
                  
                  $
                  251,612
                  
                  
                  $
                  341
                  
                  
                  $
                  32,375
                  
                  
                  $
                  2,05912/31/08
                  
                  $
                  255,655
                  
                  
                  $
                  3,227
                  
                  
                  $
                  13,724
                  
                  
                  $
                  3,99903/31/08
                  
                  $
                  309,279
                  
                  
                  $
                  4,173
                  
                  
                  $
                  5,632
                  
                  
                  $
                  34Loans
      secured by 1-4 family properties:03/31/09
                  
                  $
                  253,562
                  
                  
                  $
                  169
                  
                  
                  $
                  4,040
                  
                  
                  $
                  38012/31/08
                  
                  $
                  259,290
                  
                  
                  $
                  668
                  
                  
                  $
                  2,726
                  
                  
                  $
                  1,90103/31/08
                  
                  $
                  259,011
                  
                  
                  $
                  625
                  
                  
                  $
                  1,480
                  
                  
                  $
                  265Commercial
      real estate-secured loans:03/31/09
                  
                  $
                  389,248
                  
                  
                  $
                  700
                  
                  
                  $
                  11,769
                  
                  
                  $
                  15212/31/08
                  
                  $
                  406,886
                  
                  
                  $
                  553
                  
                  
                  $
                  2,575
                  
                  
                  $
                  88303/31/08
                  
                  $
                  320,629
                  
                  
                  $
                  355
                  
                  
                  $
                  1,404
                  
                  
                  $
                  133
  38
 
 FIRST M
& F CORPORATION
 
 The
following table shows overall statistics for non-performing loans and other
assets of the Company:
 
 (Dollars in
      thousands)
                      
                      March
      31
                      
                      
                      December
      31
                      
                      
                      March
      312009
                      
                      
                      2008
                      
                      
                      2008Nonaccrual
      loans
                      
                      $
                      52,084
                      
                      
                      $
                      20,564
                      
                      
                      $
                      9,472Other
      real estate
                      
                      
                      10,907
                      
                      
                      
                      11,061
                      
                      
                      
                      6,927Total
      non-performing assets
                      
                      $
                      62,991
                      
                      
                      $
                      31,625
                      
                      
                      $
                      16,399Past
      due 90 days or more and stillaccruing
      interest
                      
                      
                      1,409
                      
                      
                      
                      5,686
                      
                      
                      
                      5,451Restructured
      loans (accruing)
                      
                      
                      3,664
                      
                      
                      
                      3,664
                      
                      
                      
                      -Ratios:Nonaccrual
      loans to loans
                      
                      
                      4.51
                      %
                      
                      
                      1.74
                      %
                      
                      
                      .78
                      %Past
      due 90 day loans to loans
                      
                      
                      .12
                      %
                      
                      
                      .48
                      %
                      
                      
                      .45
                      %Non-performing
      assets to loans and other real estate
                      
                      
                      5.40
                      %
                      
                      
                      2.65
                      %
                      
                      
                      1.34
                      %Non-performing
      assets to assets
                      
                      
                      3.84
                      %
                      
                      
                      1.98
                      %
                      
                      
                      1.00
                      %
 
 Off-Balance
Sheet Arrangements
 
 The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At March 31, 2009, the Company had
$172.728 million in unused loan commitments outstanding. Of these commitments,
$119.740 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 first
quarter. At March 31, 2009, the Company had $3.489 million in financial standby
letters of credit issued and outstanding.
 
 At March
31, 2009, there were $34.509 million in standby letters of credit issued on the
Company’s behalf by a Federal Home Loan Bank (FHLB). At December 31, 2008 there
were $31.009 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 March 31,
2009, there were $27.000 million in FHLB letters of credit that were due to
mature on April 7, 2009.
 
 Liabilities
of $12 thousand at March 31, 2009 and $155 thousand at March 31, 2008 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
$7.396 million at March 31, 2009. These commitments are accounted for as
derivatives and are marked to fair value with changes in fair value recorded in
mortgage banking income. At March 31, 2009, mortgage origination-related
derivatives with positive fair values of $10 thousand were included in other
assets and there were no origination-related derivatives with negative fair
values.
  39
 
 FIRST M
& F CORPORATION
 
 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 March 31, 2009, the Company
had $4.793 million in locked forward sales agreements in place.  There
were no forward sale-related derivatives with positive fair values at March 31,
2009. Forward sale-related 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 $7.734 million of sold mortgages that were still in the recourse period as
of March 31, 2009. 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.
 
 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 collectability of individual loans and reflects that
collectability by assigning loan grades to individual credits. The grades will
generally determine how closely a loan will be monitored on an ongoing basis. A
customer’s payment history, financial statements, cash flow patterns and
collateral, among other factors, are reviewed to determine if the loan has
potential losses. Such information is used to determine if individual loans are
impaired and to group remaining loans into risk pools. A loan is impaired if
management estimates that it is probable that the Company will be unable to
collect all contractual payments due. Impairment estimates may be based on
discounted cash flows or collateral. Historical loan losses by loan type and
loan grade are also a significant factor in estimating future losses when
applied to the risk pools of loans not individually tested for impairment.
Various external environmental factors are also considered in estimating the
allowance. Concentrations of credit by loan type and collateral type are also
reviewed to estimate exposures and risks of loss. General economic factors as
well as economic factors for individual industries or factors that would affect
certain types of loan collateral are reviewed to determine the exposure of loans
to economic fluctuations. The Company has a loan review department that audits
types of loans as well as geographic segments to determine credit problems and
loan policy violations that require the attention of management. All of these
factors are used to determine the adequacy of the allowance for loan losses and
adjust its balance accordingly.
 
 The
allowance for loan losses is increased by the amount of the provision for loan
losses and by recoveries of previously charged-off loans. It is decreased by
loan charge-offs as they occur when principal is deemed to be
uncollectible.
  40
 
 FIRST M
& F CORPORATION
 
 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. An assessment of impairment is also
performed when circumstances or events indicate that an impairment of goodwill
may be evident.
 
 Impairment
of goodwill is recognized by a charge against earnings and is 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. Management may engage and rely on
third-party experts to perform some or all of the procedures related to the
steps involved in goodwill impairment testing to help management determine the
existence and extent of any goodwill impairment of a reporting
unit.
 
 Identifiable
intangible assets are amortized over their estimated lives. Identifiable
intangible assets that have indefinite lives are not amortized until such time
that their estimated lives are determinable. Intangible assets with indefinite
lives must be assessed for impairment annually and whenever events or
circumstances indicate that an impairment may exist.
 
 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.
  41
 
 FIRST M
& F CORPORATION
 
 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
adopted the measurement date provision of this Statement on December 31, 2008
with no material impact on its financial condition or results of
operations.
 
 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.
  42
  FIRST M
& F CORPORATION
 
 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 application 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 adopted this
Statement as of January 1, 2009 and has applied it retrospectively to prior
periods that are disclosed in the financial statements. The adoption of this
Statement did not have a material impact on the Company’s financial condition or
results of operations.
 
 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 adopted this Statement as of January 1, 2009 with no
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 application of this FSP to
have a material impact on its financial condition or results of
operations.
  43
 
 FIRST M
& F CORPORATION
 
 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 became effective on November 15, 2008.
 
 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 adopted this FSP as of January 1, 2009 and restated prior period
earnings per share through its retrospective application. The adoption of this
FSP did not have a material impact on the Company’s financial condition or
results of operations.
 
 In
October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active.” This FSP clarifies the application of SFAS No. 157 in an
inactive market, without changing its existing principles, by using an example
to illustrate key considerations in determining fair value when there is no
market in which active pricing of an instrument is occurring. The FSP was
effective immediately upon issuance. The Company adopted the FSP in October with
no material impact on its financial condition or results of
operations.
 
 In
December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP adds
disclosures related to postretirement benefit plan assets to provide the
financial statement reader with an understanding of, (a) how investment
allocation decisions are made, including factors that are pertinent to an
understanding of investment policies and strategies, (b) the major categories of
plan assets, (c) the inputs and valuation techniques used to measure the fair
value of plan assets, (d) the effect of fair value measurements using
significant unobservable inputs (Level 3) on changes in plan assets for the
period and (e) significant concentrations of risk within plan assets. This FSP
is effective for financial statements issued for fiscal years ending after
December 15, 2009. The Company does not expect the adoption of this FSP to have
a material impact on its financial condition or results of
operations.
 
 In
January 2009, the FASB issued FASB Staff Position (FSP) No. EITF 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP makes
the factors that can be evaluated when determining whether an
other-than-temporary impairment exists for beneficial interests similar to those
that are allowed for other investment securities under FASB Statement No 115.
EITF 99-20 had previously required the beneficial interest holder to use a
market participant’s view of expected cash flow without consideration of other
cash flow-related factors that the beneficial owner would typically use their
own judgment about. The FSP is effective for interim and annual reporting
periods ending after December 15, 2008. The Company adopted the FSP as of
December 31, 2008, with no material effect on its financial condition or results
of operations.
 
 In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.” This
FSP affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. This FSP requires an entity to
base its conclusion about whether a transaction was not orderly on the weight of
the evidence. This FSP also amends SFAS No. 157, “Fair Value Measurements,” to
expand certain disclosure requirements. This FSP is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted in
certain circumstances. The Company expects to adopt the provisions of the FSP
during the second quarter of 2009 and does not expect the implementation to have
a material effect on its financial condition or results of
operation.
  44
 
 FIRST M
& F CORPORATION
 
 In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 115-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” This FSP (1) changes existing
guidance for determining whether an impairment is other than temporary to debt
securities, and (2) replaces the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis. Under this
FSP, based on the intent and more likely than not assertions, declines in the
fair value of securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses, with the remainder being recognized in
other comprehensive income. The amount of the impairment related to other
factors is recognized in other comprehensive income. This FSP is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted. The Company expects to adopt the provisions of the FSP during the
second quarter of 2009 and does not expect the implementation to have a material
effect on its financial condition or results of operation.
 
 In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1, “Interim
Disclosures about Fair Value of Financial Instruments.” This FSP requires the
entity to provide disclosures about fair value of financial instruments in
interim financial information and amends Accounting Principles Board (APB)
Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in
summarized financial information at interim reporting periods. Under this FSP, a
publicly traded company shall include disclosures about the fair value of its
financial instruments whenever it issues summarized financial information for
interim reporting periods. In addition, an entity must disclose, in the body or
in the accompanying notes of its summarized financial information for interim
reporting periods and in its financial statements for annual reporting periods,
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position, as required by SFAS No. 107. This FSP is effective for
interim periods ending after June 15, 2009, with early adoption permitted. The
Company expects to adopt the provisions of the FSP during the second quarter of
2009 and does not expect the implementation to have a material effect on its
financial condition or results of operation.
 
 In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 141R-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies.” This FSP amends the guidance in SFAS No. 141R to require
that assets acquired and liabilities assumed in a business combination that
arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB
Interpretation (FIN) No. 14, “Reasonable Estimation of the Amount of a Loss.”
This FSP removes subsequent accounting guidance for assets and liabilities
arising from contingencies from SFAS No. 141R and requires entities to develop a
systematic and rational basis for subsequently measuring and accounting for
assets and liabilities arising from contingencies. This FSP eliminates the
requirement to disclose an estimate of the range of outcomes of recognized
contingencies at the acquisition date. For unrecognized contingencies, entities
are required to include only the disclosures required by SFAS No. 5. This FSP
also requires that contingent consideration arrangements of an acquiree assumed
by the acquirer in a business combination be treated as contingent consideration
of the acquirer and should be initially and subsequently measured at fair value
in accordance with SFAS No. 141R. This FSP is effective for assets and
liabilities arising from contingencies the Company may acquire in business
combinations occurring after January 1, 2009. The Company does not expect the
application of this FSP to have a material impact on its financial condition or
results of operation.
  45
  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 .02% increase 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 1.27% 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 increase by 3.10% with an
immediate and sustained increase in interest rates of 200 basis points. The
market value of equity will decrease by 7.30% with an immediate and sustained
decrease in interest rates of 100 basis points.
 
 The
Company had no hedging instruments in place at March 31, 2009.
 
 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
March 31, 2009, (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 March 31, 2009 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.
  46
 
 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 2008 Form 10-K.
 
 Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 None.
 
 Item
3 – Defaults Upon Senior Securities
 
 None.
 
 Item
4 – Submission of Matters to a Vote of Security Holders
 
 A special
stockholders’ meeting was held on February 25, 2009. The stockholders were
voting on an amendment to the Company’s Articles of Incorporation that would
allow the Board of Directors to fix the voting rights of each series of the
Company’s Class B non-voting preferred stock. The votes are summarized
below.
 
 Votes For
                    
                    Votes Against
                    
                    
                    Abstained5,721,390
                    
                    
                    476,433
                    
                    
                    
                    40,055
 
 There
were 9,169,596 shares entitled to vote on the proposals, with 6,237,878 shares,
or 68.03% actually being voted.
 
 Item
5 – Other Information
 
 None.
  47
 
 FIRST M
& F CORPORATION
 
 Item
6 – Exhibits
 
 3.1
                                        Articles
      of Incorporation of the Registrant.  Incorporated herein by
      reference to (1) Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
      September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.3.2
                                        Articles
      of Amendment of the Registrant. Incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March
      5, 2009.3.3
                                        By-laws
      of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form
      S-1 (File No. 33-08751) September 15, 1986, incorporated herein by
      reference.4.1
                                        Warrant
      to Purchase up to 513,113 Shares of Common Stock of the Registrant.
      Incorporated herein by reference to Exhibit 4.1 to the Registrant’s
      Current Report on Form 8-K, filed on March 5, 2009.10.1
                                        First
      M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the
      Company’s Proxy Statement, March 15, 2005, incorporated herein by
      reference.10.2
                                        Merchants
      and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit
      10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by
      reference.10.3
                                        Letter
      Agreement, including as Exhibit A thereto, Securities Purchase Agreement.
      Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.10.4
                                        Form
      of Preferred Stock Certificate.  Incorporated herein by
      reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
      filed on March 5, 2009.10.5
                                        Side
      Letter Agreement.  Incorporated herein by reference to Exhibit
      10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.11
                                        Computation
      of Earnings Per Share – Filed herewith as Note 10 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.
  48
 
 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 :
May 15, 2009
 
 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
  49
 
 FIRST M
& F CORPORATION
 
 EXHIBIT
INDEX
 
 3.1
                                        Articles
      of Incorporation of the Registrant.  Incorporated herein by
      reference to (1) Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
      September 15, 1986, incorporated herein by reference, and (2) Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.3.2
                                        Articles
      of Amendment of the Registrant. Incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on March
      5, 2009.3.3
                                        By-laws
      of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form
      S-1 (File No. 33-08751) September 15, 1986, incorporated herein by
      reference.4.1
                                        Warrant
      to Purchase up to 513,113 Shares of Common Stock of the Registrant.
      Incorporated herein by reference to Exhibit 4.1 to the Registrant’s
      Current Report on Form 8-K, filed on March 5, 2009.10.1
                                        First
      M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the
      Company’s Proxy Statement, March 15, 2005, incorporated herein by
      reference.10.2
                                        Merchants
      and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit
      10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by
      reference.10.3
                                        Letter
      Agreement, including as Exhibit A thereto, Securities Purchase Agreement.
      Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.10.4
                                        Form
      of Preferred Stock Certificate.  Incorporated herein by
      reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K,
      filed on March 5, 2009.10.5
                                        Side
      Letter Agreement.  Incorporated herein by reference to Exhibit
      10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5,
      2009.11
                                        Computation
      of Earnings Per Share – Filed herewith as Note 10 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.
  50