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 1934


For the
quarterly period ended March 31, 2010


Or





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934


For the
transition period from __________ to __________





Commission
File Number 000-09424





FIRST M&F
CORPORATION


(Exact
name of registrant as specified in its charter)





MISSISSIPPI
                64-0636653(State
      or other jurisdiction of
                (I.R.S.
      Employer Identification Number)Incorporation
      or organization)134 West Washington Street,  Kosciusko,
      Mississippi
                39090(Address
      of principal executive offices)
                (Zip
      Code)





662-289-5121


(Registrant’s
telephone number, including area code)





No
Change


(Former
name, former address and former fiscal year,


if
changed since the last report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.       
    x
Yes    ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes    ̈
No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.





Large
      accelerated filer  ̈
                Accelerated
      filer   ̈Non-accelerated
      filer  x  (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).


o Yes   x
No





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Common stock, $5 par value
                9,069,346 SharesTitle
      of Class
                Shares
      Outstanding at April 30,
2010





FIRST
M & F CORPORATION





FORM
10-Q





INDEX





PagePART
      1:
                          FINANCIAL
      INFORMATIONItem
      1
                          Financial
      Statements (unaudited):
                          3Consolidated
      Statements of Condition
                          3Consolidated
      Statements of Operations
                          4Consolidated
      Statements of Comprehensive Income
                          5Consolidated
      Statements of Stockholders’ Equity
                          6Consolidated
      Statements of Cash Flows
                          7Notes
      to Consolidated Financial Statements
                          9Item
      2
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                          32Item
      3
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          60Item
      4T
                          Controls
      and Procedures
                          60PART
      II:
                          OTHER
      INFORMATIONItem
      1
                          Legal
      Proceedings
                          61Item
      1A
                          Risk
      Factors
                          61Item
      2
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          61Item
      3
                          Defaults
      upon Senior Securities
                          61Item
      4
                          (Removed
      and Reserved)Item
      5
                          Other
      Information
                          61Item
      6
                          Exhibits
                          62SIGNATURES
                          63EXHIBIT
      INDEX
                          64CERTIFICATIONS


2


FIRST M
& F CORPORATION AND SUBSIDIARY





PART
I: FINANCIAL INFORMATION


Item
1 – Financial Statements (Unaudited)


Consolidated
Statements of Condition


(Dollars
      in thousands)March 31
                              
                              
                              December
      312010
                              
                              
                              2009
                              
                              
                              2009(Unaudited)
                              
                              
                              (Unaudited)
                              
                              
                              (Note
      1)AssetsCash
      and due from banks
                              
                              $
                              37,834
                              
                              
                              $
                              35,992
                              
                              
                              $
                              42,446Interest
      bearing bank balances
                              
                              
                              82,126
                              
                              
                              
                              14,985
                              
                              
                              
                              84,810Federal
      funds sold
                              
                              
                              42,000
                              
                              
                              
                              54,900
                              
                              
                              
                              70,000Securities
      available for sale, amortized cost of $285,849, $280,687 and
      $280,470
                              
                              
                              289,354
                              
                              
                              
                              285,752
                              
                              
                              
                              284,550Loans
      held for sale
                              
                              
                              8,698
                              
                              
                              
                              6,066
                              
                              
                              
                              10,266Loans,
      net of unearned income
                              
                              
                              1,042,429
                              
                              
                              
                              1,149,252
                              
                              
                              
                              1,058,340Allowance
      for loan losses
                              
                              
                              (21,115
                              )
                              
                              
                              (41,506
                              )
                              
                              
                              (24,014
                              )Net
      loans
                              
                              
                              1,021,314
                              
                              
                              
                              1,107,746
                              
                              
                              
                              1,034,326Bank
      premises and equipment
                              
                              
                              42,141
                              
                              
                              
                              44,827
                              
                              
                              
                              42,919Accrued
      interest receivable
                              
                              
                              7,040
                              
                              
                              
                              9,742
                              
                              
                              
                              7,598Other
      real estate
                              
                              
                              31,460
                              
                              
                              
                              10,907
                              
                              
                              
                              23,578Goodwill
                              
                              
                              -
                              
                              
                              
                              16,772
                              
                              
                              
                              -Other
      intangible assets
                              
                              
                              5,333
                              
                              
                              
                              5,758
                              
                              
                              
                              5,439Bank
      owned life insurance
                              
                              
                              21,270
                              
                              
                              
                              20,640
                              
                              
                              
                              21,082Other
      assets
                              
                              
                              34,531
                              
                              
                              
                              25,310
                              
                              
                              
                              35,954$
                              1,623,101
                              
                              
                              $
                              1,639,397
                              
                              
                              $
                              1,662,968Liabilities and Stockholders’
      EquityLiabilities:Noninterest-bearing
      deposits
                              
                              $
                              217,683
                              
                              
                              $
                              191,386
                              
                              
                              $
                              228,579Interest-bearing
      deposits
                              
                              
                              1,156,315
                              
                              
                              
                              1,121,774
                              
                              
                              
                              1,159,684Total
      deposits
                              
                              
                              1,373,998
                              
                              
                              
                              1,313,160
                              
                              
                              
                              1,388,263Federal
      funds purchased and repurchase agreements
                              
                              
                              14,225
                              
                              
                              
                              8,064
                              
                              
                              
                              8,642Other
      borrowings
                              
                              
                              91,240
                              
                              
                              
                              140,524
                              
                              
                              
                              122,510Junior
      subordinated debt
                              
                              
                              30,928
                              
                              
                              
                              30,928
                              
                              
                              
                              30,928Accrued
      interest payable
                              
                              
                              2,489
                              
                              
                              
                              2,999
                              
                              
                              
                              2,933Other
      liabilities
                              
                              
                              5,385
                              
                              
                              
                              5,031
                              
                              
                              
                              5,062Total
      liabilities
                              
                              
                              1,518,265
                              
                              
                              
                              1,500,706
                              
                              
                              
                              1,558,338Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Class
      B; 1,000,000 shares authorized; 30,000 shares issued
                              
                              
                              28,900
                              
                              
                              
                              28,657
                              
                              
                              
                              28,838Common
      stock of $5.00 par value; 15,000,000 shares authorized: 9,069,346,
      9,063,346 and 9,069,346 shares issued
                              
                              
                              45,347
                              
                              
                              
                              45,317
                              
                              
                              
                              45,347Additional
      paid-in capital
                              
                              
                              31,928
                              
                              
                              
                              31,842
                              
                              
                              
                              31,926Nonvested
      restricted stock awards
                              
                              
                              780
                              
                              
                              
                              788
                              
                              
                              
                              734Retained
      earnings (deficit)
                              
                              
                              (2,270
                              )
                              
                              
                              31,548
                              
                              
                              
                              (2,595
                              )Accumulated
      other comprehensive income
                              
                              
                              151
                              
                              
                              
                              538
                              
                              
                              
                              379First
      M&F Corporation equity
                              
                              
                              104,836
                              
                              
                              
                              138,690
                              
                              
                              
                              104,629Noncontrolling
      interest in subsidiaries
                              
                              
                              -
                              
                              
                              
                              1
                              
                              
                              
                              1Total
      equity
                              
                              
                              104,836
                              
                              
                              
                              138,691
                              
                              
                              
                              104,630$
                              1,623,101
                              
                              
                              $
                              1,639,397
                              
                              
                              $
                              1,662,968





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


3


FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Operations


(Unaudited)





(Dollars in thousands, except per share data)
                      
                      Three Months EndedMarch 312010
                      
                      
                      2009Interest
      income:Interest
      and fees on loans
                      
                      $
                      15,388
                      
                      
                      $
                      17,273Interest
      on loans held for sale
                      
                      
                      78
                      
                      
                      
                      79Taxable
      investments
                      
                      
                      2,045
                      
                      
                      
                      2,316Tax-exempt
      investments
                      
                      
                      430
                      
                      
                      
                      562Federal
      funds sold
                      
                      
                      26
                      
                      
                      
                      25Interest
      bearing bank balances
                      
                      
                      45
                      
                      
                      
                      6Total
      interest income
                      
                      
                      18,012
                      
                      
                      
                      20,261Interest
      expense:Deposits
                      
                      
                      5,190
                      
                      
                      
                      6,385Federal
      funds purchased and repurchase agreements
                      
                      
                      19
                      
                      
                      
                      33Other
      borrowings
                      
                      
                      1,066
                      
                      
                      
                      1,503Junior
      subordinated debt
                      
                      
                      496
                      
                      
                      
                      496Total
      interest expense
                      
                      
                      6,771
                      
                      
                      
                      8,417Net
      interest income
                      
                      
                      11,241
                      
                      
                      
                      11,844Provision
      for loan losses
                      
                      
                      2,280
                      
                      
                      
                      19,840Net
      interest income (expense) after provision for loan losses
                      
                      
                      8,961
                      
                      
                      
                      (7,996
                      )Noninterest
      income:Deposit
      account income
                      
                      
                      2,480
                      
                      
                      
                      2,522Mortgage
      banking income
                      
                      
                      343
                      
                      
                      
                      368Agency
      commission income
                      
                      
                      898
                      
                      
                      
                      971Trust
      and brokerage income
                      
                      
                      121
                      
                      
                      
                      116Bank
      owned life insurance income
                      
                      
                      170
                      
                      
                      
                      117Other
      income
                      
                      
                      789
                      
                      
                      
                      1,094Securities
      gains, net
                      
                      
                      1,004
                      
                      
                      
                      -Total
      investment other-than-temporary impairment losses
                      
                      
                      (271
                      )
                      
                      
                      -Portion
      of loss recognized in other comprehensive income (before
      taxes)
                      
                      
                      69
                      
                      
                      
                      -Net
      investment impairment losses recognized
                      
                      
                      (202
                      )
                      
                      
                      -Total
      noninterest income
                      
                      
                      5,603
                      
                      
                      
                      5,188Noninterest
      expenses:Salaries
      and employee benefits
                      
                      
                      6,825
                      
                      
                      
                      7,162Net
      occupancy expenses
                      
                      
                      969
                      
                      
                      
                      1,108Equipment
      expenses
                      
                      
                      651
                      
                      
                      
                      755Software
      and processing expenses
                      
                      
                      402
                      
                      
                      
                      526Telecommunication
      expenses
                      
                      
                      244
                      
                      
                      
                      259Marketing
      and business development expenses
                      
                      
                      242
                      
                      
                      
                      372Foreclosed
      property expenses
                      
                      
                      456
                      
                      
                      
                      756FDIC
      insurance assessments
                      
                      
                      846
                      
                      
                      
                      476Goodwill
      impairment
                      
                      
                      -
                      
                      
                      
                      15,800Intangible
      asset amortization and impairment
                      
                      
                      106
                      
                      
                      
                      1,369Other
      expenses
                      
                      
                      2,668
                      
                      
                      
                      2,458Total
      noninterest expenses
                      
                      
                      13,409
                      
                      
                      
                      31,041Income
      (loss) before income taxes
                      
                      
                      1,155
                      
                      
                      
                      (33,849
                      )Income
      tax expense (benefit)
                      
                      
                      301
                      
                      
                      
                      (6,592
                      )Net
      income (loss)
                      
                      
                      854
                      
                      
                      
                      (27,257
                      )Net
      income (loss) attributable to noncontrolling interests
                      
                      
                      1
                      
                      
                      
                      (16
                      )Net
      income (loss) attributable to First M&F Corporation
                      
                      $
                      853
                      
                      
                      $
                      (27,241
                      )Dividends
      and accretion on preferred stock
                      
                      
                      437
                      
                      
                      
                      154Net
      income (loss) applicable to common stock
                      
                      $
                      416
                      
                      
                      $
                      (27,395
                      )Net
      income (loss) allocated to common shareholders
                      
                      $
                      413
                      
                      
                      $
                      (27,089
                      )Earnings
      (loss) per share:Basic
                      
                      $
                      .05
                      
                      
                      $
                      (2.99
                      )Diluted
                      
                      $
                      .05
                      
                      
                      $
                      (2.99
                      )





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





4




FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income


(Unaudited)





Three Months EndedMarch 312010
                  
                  
                  2009Net
      income (loss)
                  
                  $
                  854
                  
                  
                  $
                  (27,257
                  )Other
      comprehensive income:Unrealized
      gains (losses) on securities:Unrealized
      gains on securities available for sale arising during the period, net of
      tax of $185 and $673 for the three months ended March 31
                  
                  
                  313
                  
                  
                  
                  1,130Unrealized
      losses on other-than-temporarily impaired securities available for sale
      arising during the period, net of tax of $100 for the three months ended
      March 31
                  
                  
                  (171
                  )
                  
                  
                  -Reclassification
      adjustment for (gains) losses on securities available for sale included in
      net income, net of tax of $374 for the three months ended March
      31
                  
                  
                  (630
                  )
                  
                  
                  -Reclassification
      adjustment for credit related other-than- temporary impairment losses on
      securities available for sale included in net income, net of tax of $75
      for the three months ended March 31
                  
                  
                  127
                  
                  
                  
                  -Defined
      benefit pension plans:Amortization
      of transition asset, net of tax of $0 and $1 for the three months ended
      March 31
                  
                  
                  -
                  
                  
                  
                  (1
                  )Amortization
      of prior service cost, net of tax of $3 and $3 for the three months ended
      March 31
                  
                  
                  (6
                  )
                  
                  
                  (6
                  )Amortization
      of actuarial loss, net of tax of $82 and $84 for the three months ended
      March 31
                  
                  
                  139
                  
                  
                  
                  142Other
      comprehensive income (loss)
                  
                  
                  (228
                  )
                  
                  
                  1,265Total
      comprehensive income (loss)
                  
                  
                  626
                  
                  
                  
                  (25,992
                  )Comprehensive
      income (loss) attributable to noncontrolling interests
                  
                  
                  1
                  
                  
                  
                  (16
                  )Comprehensive
      income (loss) of First M&F Corp
                  
                  $
                  625
                  
                  
                  $
                  (25,976
                  )





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, 2010 and 2009


(Unaudited)





(Dollars in thousands, except per share data)
                
                
                
                
                
                
                
                
                Nonvested
                
                
                
                
                
                AccumulatedAdditional
                
                
                Restricted
                
                
                Retained
                
                
                OtherPreferred
                
                
                Common
                
                
                Paid-in
                
                
                Stock
                
                
                Earnings
                
                
                Comprehensive
                
                
                NoncontrollingStock
                
                
                Stock
                
                
                Capital
                
                
                Awards
                
                
                (Deficit)
                
                
                Income (Loss)
                
                
                Interest
                
                
                TotalJanuary
      1, 2009
                
                $
                -
                
                
                $
                45,317
                
                
                $
                30,447
                
                
                $
                780
                
                
                $
                60,133
                
                
                $
                (727
                )
                
                $
                18
                
                
                $
                135,968Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (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
                
                
                -
                
                
                
                -
                
                
                
                5
                
                
                
                8
                
                
                
                1
                
                
                
                -
                
                
                
                -
                
                
                
                14Tax
      benefits on restricted stock dividends paid
                
                
                -
                
                
                
                -
                
                
                
                27
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27Net
      change
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,265
                
                
                
                -
                
                
                
                1,265Distributions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1
                )
                
                
                (1
                )March
      31, 2009
                
                $
                28,657
                
                
                $
                45,317
                
                
                $
                31,842
                
                
                $
                788
                
                
                $
                31,548
                
                
                $
                538
                
                
                $
                1
                
                
                $
                138,691January
      1, 2010
                
                $
                28,838
                
                
                $
                45,347
                
                
                $
                31,926
                
                
                $
                734
                
                
                $
                (
      2,595
                )
                
                $
                379
                
                
                $
                1
                
                
                $
                104,630Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                853
                
                
                
                -
                
                
                
                1
                
                
                
                854Cash
      dividends ($.01 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (91
                )
                
                
                -
                
                
                
                -
                
                
                
                (91
                )Dividends
      and accretion on preferred stock
                
                
                62
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (437
                )
                
                
                -
                
                
                
                -
                
                
                
                (375
                )Share-based
      compensation expense recognized
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                46
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                48Net
      change
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (228
                )
                
                
                -
                
                
                
                (228
                )Distributions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2
                )
                
                
                (2
                )March
      31, 2010
                
                $
                28,900
                
                
                $
                45,347
                
                
                $
                31,928
                
                
                $
                780
                
                
                $
                (2,270
                )
                
                $
                151
                
                
                $
                -
                
                
                $
                104,836





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 312010
                
                
                2009Cash
      flows from operating activities:Net
      income (loss)
                
                $
                854
                
                
                $
                (27,257
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Share-based
      compensation
                
                
                48
                
                
                
                14Amortization
      of pension costs
                
                
                197
                
                
                
                219Depreciation
      and amortization
                
                
                688
                
                
                
                800Goodwill
      impairment
                
                
                -
                
                
                
                15,800Intangible
      asset impairments
                
                
                -
                
                
                
                1,248Provision
      for loan losses
                
                
                2,280
                
                
                
                19,840Net
      investment amortization
                
                
                455
                
                
                
                58Net
      change in unearned fees/deferred costs on loans
                
                
                (153
                )
                
                
                (68
                )Capitalized
      dividends on FHLB stock
                
                
                (7
                )
                
                
                (10
                )Net
      accretion of discount on time deposits
                
                
                4
                
                
                
                2Gain
      on securities available for sale
                
                
                (1,004
                )
                
                
                -Impairment
      loss on securities available for sale
                
                
                202
                
                
                
                -Gain
      on loans held for sale
                
                
                (288
                )
                
                
                (73
                )Other
      asset sales losses
                
                
                191
                
                
                
                464Deferred
      income taxes
                
                
                284
                
                
                
                (7,145
                )Originations
      of loans held for sale, net of repayments
                
                
                (20,703
                )
                
                
                (26,023
                )Sales
      proceeds of loans held for sale
                
                
                22,600
                
                
                
                27,713(Increase)
      decrease in:Accrued
      interest receivable
                
                
                558
                
                
                
                90Cash
      surrender value of bank owned life insurance
                
                
                (170
                )
                
                
                (117
                )Other
      assets
                
                
                1,274
                
                
                
                1,869Increase
      (decrease) in:Accrued
      interest payable
                
                
                (444
                )
                
                
                (538
                )Other
      liabilities
                
                
                332
                
                
                
                1,161Net
      cash provided by operating activities
                
                
                7,198
                
                
                
                8,047Cash
      flows from investing activities:Purchases
      of securities available for sale
                
                
                (81,182
                )
                
                
                (72,495
                )Sales
      of securities available for sale
                
                
                39,548
                
                
                
                1,665Maturities
      of securities available for sale
                
                
                36,602
                
                
                
                13,967Net
      (increase) decrease in:Interest
      bearing bank balances
                
                
                2,684
                
                
                
                (8,429
                )Federal
      funds sold
                
                
                28,000
                
                
                
                (45,550
                )Loans
                
                
                1,873
                
                
                
                19,363Bank
      premises and equipment
                
                
                41
                
                
                
                (850
                )Net
      purchases of bank owned life insurance
                
                
                (18
                )
                
                
                (1
                )Sales
      of nonperforming loans
                
                
                500
                
                
                
                -Proceeds
      from sales of other real estate and other repossessed
    assets
                
                
                566
                
                
                
                4,393Net
      redemptions of FHLB stock
                
                
                -
                
                
                
                225Net
      cash provided by (used in) investing activities
                
                
                28,614
                
                
                
                (87,712
                )





(Continued)


7


FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





(Dollars in thousands)
                  
                  Three Months Ended March 312010
                  
                  
                  2009Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                  
                  $
                  (14,269
                  )
                  
                  $
                  51,771Net
      increase (decrease) in short-term borrowings
                  
                  
                  5,583
                  
                  
                  
                  (1,664
                  )Proceeds
      from other borrowings
                  
                  
                  -
                  
                  
                  
                  -Repayments
      of other borrowings
                  
                  
                  (31,270
                  )
                  
                  
                  (11,023
                  )Earnings
      distributions to noncontrolling interests
                  
                  
                  (2
                  )
                  
                  
                  (1
                  )Common
      dividends paid
                  
                  
                  (91
                  )
                  
                  
                  (1,191
                  )Preferred
      dividends paid
                  
                  
                  (375
                  )
                  
                  
                  -Preferred
      shares and common stock warrant issued to U. S. Treasury
                  
                  
                  -
                  
                  
                  
                  30,000Tax
      benefits related to share-based compensation
                  
                  
                  -
                  
                  
                  
                  27Net
      cash provided by (used in) financing activities
                  
                  
                  (40,424
                  )
                  
                  
                  67,919Net
      decrease in cash and due from banks
                  
                  
                  (4,612
                  )
                  
                  
                  (11,746
                  )Cash
      and due from banks at January 1
                  
                  
                  42,446
                  
                  
                  
                  47,738Cash
      and due from banks at March 31
                  
                  $
                  37,834
                  
                  
                  $
                  35,992Total
      interest paid
                  
                  $
                  7,216
                  
                  
                  $
                  8,951Total
      income taxes paid
                  
                  
                  226
                  
                  
                  
                  97Income
      tax refunds received
                  
                  
                  210
                  
                  
                  
                  27Total
      payments to other banks to satisfy liens on ORE
                  
                  
                  433
                  
                  
                  
                  -Transfers
      of loans to foreclosed property
                  
                  
                  8,484
                  
                  
                  
                  4,756Transfers
      of buildings to foreclosed property
                  
                  
                  176
                  
                  
                  
                  -U.
      S. Treasury preferred dividend accrued but unpaid
                  
                  
                  187
                  
                  
                  
                  134Accretion
      on U. S. Treasury preferred stock
                  
                  
                  62
                  
                  
                  
                  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, 2009, has been
derived from audited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The condensed consolidated financial
statements include all entities in which the Company has a controlling financial
interest. Therefore, the condensed consolidated financial statements of First M
& F Corporation include the financial statements of Merchants and Farmers
Bank, a wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First
M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F
Bank Securities Corporation, M & F Insurance Agency, Inc., M & F
Insurance Group, Inc., and M & F Business Credit, Inc. The consolidated
financial statements also include the Bank’s 55% ownership in MS Statewide
Title, LLC, a title insurance agency. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2009.
Operating results for the interim periods disclosed herein are not necessarily
indicative of the results that may be expected for a full year or any future
period.





The
Company is substantially in the business of community banking and therefore is
considered a banking operation with no separately reportable
segments.





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about future economic and market conditions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Although our estimates and assumptions contemplate current
economic conditions and how we expect them to change in the future, it is
reasonably possible that in future months actual conditions could be worse than
those anticipated, which could materially affect our financial condition and
results of operations. The allowance for loan losses, the fair value of
financial instruments and other-than-temporary investment impairments represent
significant estimates.





Certain
reclassifications have been made to the 2009 financial statements to be
consistent with the 2010 presentation.





Note 2:  Fair
Value





Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A
fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability. Valuation techniques use certain inputs to arrive at fair
value. Inputs to valuation techniques are the assumptions that market
participants would use in pricing the asset or liability. They may be observable
or unobservable. Applicable accounting principles establish a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. Assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. The fair value hierarchy is as follows:





Level 1
Inputs – Unadjusted quoted market prices in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date.





Level 2
Inputs – Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability
(such as interest rates, volatilities, prepayment speeds or credit risks) or
inputs that are derived principally from or corroborated by market data by
correlation or other means.





Level 3
Inputs – Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions that
market participants would use in pricing the assets or
liabilities.


9


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
following table summarizes assets and liabilities measured at fair value on a
recurring basis as of March 31, 2010, December 31, 2009 and 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, 2010, UsingQuotedPrices InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars in thousands)
                
                March 31, 2010
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)U.S.
      Treasury securities
                
                $
                510
                
                
                $
                -
                
                
                $
                510
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                62,507
                
                
                
                -
                
                
                
                62,507
                
                
                
                -Mortgage-backed
      investments
                
                
                171,809
                
                
                
                -
                
                
                
                171,809
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                50,135
                
                
                
                -
                
                
                
                50,135
                
                
                
                -Collateralized
      debt obligations
                
                
                1,045
                
                
                
                -
                
                
                
                -
                
                
                
                1,045Other
      debt securities
                
                
                2,501
                
                
                
                -
                
                
                
                2,501
                
                
                
                -Equity
      securities
                
                
                847
                
                
                
                847
                
                
                
                -
                
                
                
                -Total
      securities available for sale
                
                $
                289,354
                
                
                $
                847
                
                
                $
                287,462
                
                
                $
                1,045Mortgage
      derivative assets
                
                
                79
                
                
                
                -
                
                
                
                -
                
                
                
                79Mortgage
      derivative liabilities
                
                
                11
                
                
                
                -
                
                
                
                -
                
                
                
                11





Fair Value Measurements atDecember 31, 2009, UsingQuotedPrices InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars in thousands)
                
                December 31, 2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)U.S.
      Treasury securities
                
                $
                517
                
                
                $
                -
                
                
                $
                517
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                55,161
                
                
                
                -
                
                
                
                55,161
                
                
                
                -Mortgage-backed
      investments
                
                
                167,875
                
                
                
                -
                
                
                
                167,875
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                56,586
                
                
                
                -
                
                
                
                56,586
                
                
                
                -Collateralized
      debt obligations
                
                
                1,080
                
                
                
                -
                
                
                
                -
                
                
                
                1,080Other
      debt securities
                
                
                2,486
                
                
                
                -
                
                
                
                2,486
                
                
                
                -Equity
      securities
                
                
                845
                
                
                
                845
                
                
                
                -
                
                
                
                -Total
      available for sale securities
                
                $
                284,550
                
                
                $
                845
                
                
                $
                282,625
                
                
                $
                1,080Mortgage
      derivative assets
                
                
                85
                
                
                
                -
                
                
                
                -
                
                
                
                85Mortgage
      derivative liabilities
                
                
                1
                
                
                
                -
                
                
                
                -
                
                
                
                1


10


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Fair Value Measurements 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)U.S.
      Treasury securities
                
                $
                535
                
                
                $
                -
                
                
                $
                535
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                30,588
                
                
                
                -
                
                
                
                30,588
                
                
                
                -Mortgage-backed
      investments
                
                
                182,633
                
                
                
                -
                
                
                
                182,633
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                64,811
                
                
                
                -
                
                
                
                64,811
                
                
                
                -Collateralized
      debt obligations
                
                
                4,017
                
                
                
                -
                
                
                
                4,017
                
                
                
                -Other
      debt securities
                
                
                2,590
                
                
                
                -
                
                
                
                2,590
                
                
                
                -Equity
      securities
                
                
                578
                
                
                
                578
                
                
                
                -
                
                
                
                -Total
      securities available for sale
                
                $
                285,752
                
                
                $
                578
                
                
                $
                285,174
                
                
                $
                -Mortgage
      derivative assets
                
                
                10
                
                
                
                -
                
                
                
                10
                
                
                
                -Mortgage
      derivative liabilities
                
                
                6
                
                
                
                -
                
                
                
                6
                
                
                
                -





U.S. Treasury, Government sponsored
entity and mortgage-backed securities. Securities issued by the U.S.
Treasury and Government sponsored entities and mortgage-backed securities are
traded in a dealer market and are reported at fair value utilizing Level 2
inputs. For these securities, the Company obtains fair value measurements from
an independent pricing service that primarily uses trading activity in the
dealer market to determine market prices.





Obligations of states and political
subdivisions. Municipal securities include investments that are traded in
a dealer market and investments that trade infrequently and are reported using
Level 2 inputs. The fair value measurements are obtained from both an
independent pricing service and from a correspondent bank’s broker-dealer
portfolio accounting product that utilizes a pricing matrix that considers
observable inputs obtained from a municipal security data provider such as
dealer quotes, market yield curves, credit information (including observable
default rates) and the instrument’s contractual terms and conditions, among
other things.





Other debt securities. Other
debt securities trade in a dealer market and are reported using Level 2 inputs.
The fair value measurements are provided by an independent pricing service and
are derived from trading activity in the dealer market.





Collateralized debt
obligations. The Company owns certain beneficial interests in
collateralized debt obligations secured by community bank trust preferred
securities. These interests have an amortized cost of $3.969 million with
estimated fair values of $1.045 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 utilizes a discounted cash flow model
using inputs of (1) market yields of trust-preferred securities as the discount
rate and (2) expected cash flows which are estimated using assumptions related
to defaults, deferrals and prepayments to determine the fair values of these
beneficial interests. Many of the factors that adjust the timing and extent of
cash flows are based on judgment and not directly observable in the markets.
Therefore, these fair values are classified as Level 3 valuations for accounting
and disclosure purposes.


11


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Equity securities. Equity
securities are comprised of mutual funds that are actively exchanged at their
net asset value (NAV).





Mortgage
Derivatives.  Throughout 2009 mortgage derivative assets and
liabilities were reported at fair value utilizing Level 2 inputs. These assets
and liabilities represent the fair values of the interest rate lock commitments
(IRLCs) of the Company to originate mortgages at certain rates as well as the
commitments, or forward sale agreements (FSAs), to sell the mortgages to
investors at locked prices within a specified period of time. The Company uses
an internal valuation model with observable market data inputs consisting
primarily of dealer quotes, market yield curves and credit-related adjustments.
The most significant inputs used in 2009 were dealer quotes. During the fourth
quarter of 2009 the model for FSA derivatives was changed to supplement the
dealer quotes with estimates of servicing values. The model for IRLC derivatives
was adjusted to use estimated pull-through rates. Therefore, these instruments
were transferred to Level 3 status upon their valuations at December 31,
2009.  Mortgage derivative assets are included in other assets and
mortgage derivative liabilities are included in other liabilities in the
Company’s balance sheet.





The
following table reports the activity for 2010 in assets measured at fair value
on a recurring basis using significant unobservable inputs.





Fair Value Measurements UsingSignificant Unobservable Inputs(Dollars in thousands)
                        
                        (Level 3)CollateralizedDebt
                        
                        
                        MortgageObligations
                        
                        
                        DerivativesBalance
      at January 1, 2010
                        
                        $
                        1,080
                        
                        
                        $
                        84Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                        
                        
                        (202
                        )
                        
                        
                        -Other-than-temporary
      impairment included in other comprehensive income
                        
                        
                        (69
                        )
                        
                        
                        -Other
      gains/losses included in other comprehensive income
                        
                        
                        236
                        
                        
                        
                        -Purchases,
      issuances, and settlements
                        
                        
                        -
                        
                        
                        
                        -Transfers
      in and/or out of Level 3
                        
                        
                        -
                        
                        
                        
                        -IRLC
      and FSA issuances, expirations and fair value changes included in
      earnings
                        
                        
                        -
                        
                        
                        
                        (5
                        )IRLC
      transfers into closed loans
                        
                        
                        -
                        
                        
                        
                        (11
                        )IRLC
      and FSA transfers in and/or out of Level 3
                        
                        
                        -
                        
                        
                        
                        -Balance
      at March 31, 2010
                        
                        $
                        1,045
                        
                        
                        $
                        68The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                        
                        $
                        (202
                        )
                        
                        $
                        -


12


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of March 31, 2010, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:





Fair Value Measurements UsingQuotedPrices in
                
                
                
                
                
                
                
                
                
                
                
                Fair ValueActive
                
                
                Significant
                
                
                
                
                
                Charged to
                
                
                AdjustmentFor the
                
                
                Markets for
                
                
                Other
                
                
                Significant
                
                
                Allowance
                
                
                RecognizedYear-to-Date
                
                
                Identical
                
                
                Observable
                
                
                Unobservable
                
                
                for Loan Losses
                
                
                In EarningsEnded
                
                
                Assets
                
                
                Inputs
                
                
                Inputs
                
                
                During
                
                
                During(Dollars in thousands)
                
                03/31/10 (a)
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                Current Period
                
                
                Current PeriodImpaired
      loans
                
                $
                14,516
                
                
                $
                -
                
                
                $
                -
                
                
                $
                14,516
                
                
                $
                -
                
                
                $
                (1,056
                )Loan
      foreclosures
                
                
                3,122
                
                
                
                -
                
                
                
                -
                
                
                
                3,122
                
                
                
                1,320
                
                
                
                -Loans
      transferred to HFS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                325
                
                
                
                -Other
      real estate
                
                
                2,125
                
                
                
                -
                
                
                
                -
                
                
                
                2,125
                
                
                
                -
                
                
                
                (197
                )





(a)
            These
      amounts represent the carrying amounts on the consolidated statement of
      condition at the balance sheet date for impaired real estate-secured loans
      and other real estate for which fair value re-measurements took place
      during the period. Loan foreclosures represent the fair value portion of
      the carrying amounts of other real estate properties that were re-measured
      at the point of foreclosure during the period and were still owned at the
      balance sheet date.





Gains and
losses recognized due to fair value re-measurements are recorded in the
consolidated statements of operations in (1) provision for loan losses for
impaired loans and (2) foreclosed property expenses for other real
estate.





Impaired
Loans.  Certain financial assets such as impaired loans are
measured by means that are similar to fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to adjustments similar to fair value adjustments in certain
circumstances, such as when there is evidence of impairment. Impaired values are
determined by discounting expected cash flows by a rate equal to the original
yield on the loan rather than by a market discount rate. However, when market
prices or dealer quotes for loans are available and can be used, then the
impaired value does meet the definition of fair value. Collateral dependent
loans, which are loans for which the repayment is expected to be provided solely
by the underlying collateral, are valued for impairment purposes by using the
fair value of the underlying collateral. For collateral dependent loans,
collateral values are estimated using Level 3 inputs based on observable market
data.





Loan
Foreclosures.  During 2010 certain foreclosed assets, upon
initial recognition, were re-measured and reported at fair value through a
charge-off to the allowance for possible loan losses based upon the fair value
of the foreclosed asset. The fair value of a foreclosed asset, upon initial
recognition, is estimated using Level 3 inputs based on observable market data.
Foreclosed assets measured at fair value upon initial recognition during 2010
totaled $3.122 million using Level 3 valuation inputs. 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 $1.320 million. During the first quarter of 2010 there were no sales of
these properties. Of the properties remaining at the end of the first quarter of
2010, no fair value write downs had been taken subsequent to foreclosure. The
fair value of the foreclosed assets was recorded in other real
estate.





Loans Transferred To Held For
Sale.  Certain nonperforming loans held for investment were
transferred to held for sale status during 2010. Loans with an amortized cost of
$825 thousand were written down by $325 thousand to a fair value of $500
thousand upon transfer to held for sale status. The $325 thousand write-down was
charged to the allowance for loan losses. The loans were subsequently sold for
$500 thousand.





Other real
estate.  Other real estate consists of real estate from loans
that have been foreclosed on. It is carried at the lower of cost or fair value
less costs to sell. Subsequent to foreclosure, these properties may experience
further market declines. When this occurs, the Company writes the property down
to management’s best estimate of what the market may be willing to pay.
Management considers what other properties have sold for, how long properties
have been on the market, the condition of the property, the availability of
liquid buyers and other assumptions that market participants may use in
determining a price at which they would acquire the property. Since certain
significant inputs to these estimates are management-derived and unobservable,
fair values are reported as using Level 3 inputs. Impairments of $197 thousand
were recorded during 2010 on properties with original carrying values of $2.322
million. No properties that had been written down during 2010 were disposed of
during 2010.


13


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Fair Value of Financial
Instruments





The
following table presents the carrying amounts and fair values of the Company’s
financial instruments at March 31, 2010 and December 31, 2009:





March 31, 2010
                
                
                December 31, 2009(Dollars in thousands)
                
                Carrying
                
                
                Estimated
                
                
                Carrying
                
                
                EstimatedAmount
                
                
                Fair Value
                
                
                Amount
                
                
                Fair ValueFinancial
      assets:Cash
      and short-term investments
                
                $
                161,960
                
                
                $
                161,960
                
                
                $
                197,256
                
                
                $
                197,256Securities
      available for sale
                
                
                289,354
                
                
                
                289,354
                
                
                
                284,550
                
                
                
                284,550Loans
      held for sale
                
                
                8,698
                
                
                
                8,735
                
                
                
                10,266
                
                
                
                10,270Loans
      held for investment
                
                
                1,021,314
                
                
                
                956,590
                
                
                
                1,034,326
                
                
                
                996,382Agency
      accounts receivable
                
                
                232
                
                
                
                232
                
                
                
                357
                
                
                
                357Accrued
      interest receivable
                
                
                7,040
                
                
                
                7,040
                
                
                
                7,598
                
                
                
                7,598Nonmarketable
      equity investments
                
                
                7,333
                
                
                
                7,333
                
                
                
                7,326
                
                
                
                7,326Investment
      in unconsolidated VIE
                
                
                928
                
                
                
                928
                
                
                
                928
                
                
                
                928Mortgage
      derivative assets
                
                
                79
                
                
                
                79
                
                
                
                85
                
                
                
                85Financial
      liabilities:Noninterest-bearing
      deposits
                
                
                217,683
                
                
                
                217,683
                
                
                
                228,579
                
                
                
                228,579NOW,
      MMDA and savings deposits
                
                
                585,636
                
                
                
                585,636
                
                
                
                583,879
                
                
                
                583,879Certificates
      of deposit
                
                
                570,679
                
                
                
                579,252
                
                
                
                575,806
                
                
                
                580,895Short-term
      borrowings
                
                
                14,225
                
                
                
                14,225
                
                
                
                8,642
                
                
                
                8,642Other
      borrowings
                
                
                91,240
                
                
                
                92,810
                
                
                
                122,510
                
                
                
                124,021Junior
      subordinated debt
                
                
                30,928
                
                
                
                19,888
                
                
                
                30,928
                
                
                
                15,835Agency
      accounts payable
                
                
                501
                
                
                
                501
                
                
                
                639
                
                
                
                639Accrued
      interest payable
                
                
                2,489
                
                
                
                2,489
                
                
                
                2,933
                
                
                
                2,933Mortgage
      derivative liabilities
                
                
                11
                
                
                
                11
                
                
                
                1
                
                
                
                1Other
      financial instruments:Commitments
      to extend credit and letters of credit
                
                
                (28
                )
                
                
                (365
                )
                
                
                (31
                )
                
                
                (400
                )





The
following methods and assumptions were used by the Company in estimating the
fair value of financial instruments:





Cash and
due from banks, interest-bearing deposits with banks and Federal funds sold are
valued at their carrying amounts which are reasonable estimates of fair value
due to the relatively short period to maturity of the instruments.





Securities
available for sale are predominantly valued based on prices obtained from an
independent nationally recognized pricing service and market yield matrices. We
use an external pricing service to electronically provide prices by CUSIP
number. These prices include exchange quoted prices, dealer quoted prices and
prices derived from market yields published by specialized financial database
providers. We use the one price per instrument provided for the securities that
the service can produce prices for. We do not adjust the prices that are
obtained from external pricing services. Typically, all securities except for
some small municipal issues and the collateralized debt obligations are priced
by the primary external provider. For issues that are not priced by the primary
provider, we use the pricing disclosed in the investment accounting product
provided by a broker-dealer affiliate of a correspondent bank. The
broker-dealer’s accounting system uses prices provided by (1) the same external
pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with
market yield inputs provided by Bloomberg and a municipal securities market data
provider and (4) the broker-dealer’s trading staff. Any quotes provided by a
broker-dealer are usually non-binding. However, the Company rarely uses
solicited broker-dealer quotes to price any of its securities. The broker-dealer
prices all municipal securities through its pricing matrix. At March 31, 2010,
the only securities that were not priced by the primary provider were 22
municipal bonds representing 6 issuers and the collateralized debt obligations.
We used the broker-dealer’s matrix prices for the municipal securities and a
third-party provider’s modeled prices for the collateralized debt obligations
(CDOs).





CDOs are
valued by an external party using a model. The model inputs are (1) discount
margins based on current market activity and (2) cash flows based upon
contractual amounts adjusted for expected defaults, expected deferrals and
expected prepayments. Expected defaults and deferrals are determined through a
credit analysis of and risk rating assignment to each obligor of the collateral
that funds the investment vehicles. Most of these inputs are not directly
observable in the market, resulting in the fair values being classified as Level
3 valuations within the fair value accounting hierarchy.


14


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
primary method of validation of investment security values that we use is the
comparison of the prices that we receive from our primary pricing service
provider with the prices that are used in the broker-dealer’s investment
accounting reports. The fair values used for selected agency, mortgage-backed
and corporate securities are also periodically checked by comparing them to
prices obtained from Bloomberg. The CDOs may be validated by comparing the fair
values with those obtained by other valuation experts. We moved to a new
valuation provider and new model to value the CDOs at September 30, 2009. The
result, primarily due to a change in valuation methodology, was a reduction of
fair values of the CDOs by approximately $1.000 million as compared to their
June 30, 2009 values. The new model incorporated a different methodology for (1)
determining the amounts and timing of future defaults, deferrals, recoveries and
cures and (2) determining the discount rate used. The new model assumptions were
also used as inputs in the third and fourth quarters of 2009 and subsequent
impairment tests of the CDOs. We review the documentation provided with the CDO
pricing and impairment models to assure that sound valuation methodologies are
used and to determine whether or not the significant inputs are observable in
the market.





Loans
held for sale are valued by discounting the estimated cash flows using current
market rates for instruments with similar credit ratings and maturities and
adjusting those rates using dealer pricing adjustments for characteristics
unique to the borrower’s circumstances or the structuring of the
credit.





Loans
held for investment are valued by discounting the estimated future cash flows,
using rates at which these loans would currently be made to borrowers with
similar credit ratings and similar maturities.





Agency
accounts receivable are trade receivables of M&F Insurance Group, Inc. These
receivables are short-term in nature and therefore the fair value is assumed to
be the carrying value. These receivables are carried in other assets in the
statement of condition.





Accrued
interest receivable is short-term in nature and therefore the fair value is
assumed to be the carrying value.





Nonmarketable
equity securities are primarily securities of the Federal Home Loan Banks for
which the carrying value is estimated to be an accurate approximation of fair
value. These equity securities are carried in other assets in the statement of
condition.





Investment
in unconsolidated VIE is the Company’s investment in the First M&F Statutory
Trust I, which acquired the Company’s junior subordinated debt through funding
provided by the issuance of trust preferred securities. The investment depends
on the Company’s own cash flows and therefore, the carrying value is an accurate
approximation of fair value. This investment is carried in other assets in the
statement of condition.





Noninterest-bearing
deposits do not pay interest and do not have defined maturity dates. Therefore,
the carrying value is equivalent to fair value for these deposits.





NOW, MMDA
and savings deposits pay interest and generally do not have defined maturity
dates. Although there are some restrictions on access to certain savings
deposits, these restrictions are not assumed to have a material effect on the
value of the deposits. Therefore, the fair value for NOW, MMDA and savings
deposits is assumed to be their carrying value.





Certificates
of deposit pay interest and do have defined maturity dates. The fair value of
certificates of deposit is estimated by discounting the future cash flows, using
current market rates for certificates of deposit of similar
maturities.





Short-term
borrowings are highly liquid and therefore the net book value of the majority of
these financial instruments approximates fair value due to the short term nature
of these items.





The fair
value of other borrowings, which consist of Federal Home Loan Bank advances and
borrowings from correspondent banks is estimated by discounting the future cash
flows, using current market rates for borrowings of similar terms and
maturities.





Junior
subordinated debt is valued by discounting the expected cash flows using a
current market rate for similar instruments.


15


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Agency
accounts payable are trade payables of M&F Insurance Group, Inc. due to
insurance companies. These payables are very short term in nature and therefore
the fair value of the payables is assumed to be their carrying value. These
payables are carried in other liabilities in the statement of
condition.





Accrued
interest payable is short-term in nature and therefore the fair value is assumed
to be the carrying value.





Commitments
to extend credit and letters of credit are valued based on the fees charged to
enter into similar credit arrangements.





Mortgage
origination and sale commitments are considered derivatives and are therefore
carried at fair market value with the changes in market value recorded in
mortgage banking income. Mortgage-related commitments with positive values are
carried in other assets and those with negative balances are carried in other
liabilities in the statement of condition. Mortgage derivatives are valued using
a combination of market discount rates, dealer quotes, estimated servicing
values and pull-through rates.





Note
3:  Investment Securities and Derivatives





The
following is a summary of the amortized cost and fair value of securities
available for sale at March 31, 2010, December 31, 2009 and March 31,
2009:





Amortized
                
                
                Gross Unrealized
                
                
                Fair(Dollars in thousands)
                
                Cost
                
                
                Gains
                
                
                Losses
                
                
                ValueMarch
      31, 2010:U.S.
      Treasury securities
                
                $
                502
                
                
                $
                8
                
                
                $
                -
                
                
                $
                510U.S.
      Government sponsored entities
                
                
                62,002
                
                
                
                590
                
                
                
                85
                
                
                
                62,507Mortgage-backed
      investments
                
                
                167,186
                
                
                
                4,859
                
                
                
                236
                
                
                
                171,809Obligations
      of states and political subdivisions
                
                
                48,943
                
                
                
                1,299
                
                
                
                107
                
                
                
                50,135Collateralized
      debt obligations
                
                
                3,969
                
                
                
                -
                
                
                
                2,924
                
                
                
                1,045Other
      debt securities
                
                
                2,381
                
                
                
                120
                
                
                
                -
                
                
                
                2,501Equity
      securities
                
                
                866
                
                
                
                20
                
                
                
                39
                
                
                
                847$
                285,849
                
                
                $
                6,896
                
                
                $
                3,391
                
                
                $
                289,354December
      31, 2009:U.S.
      Treasury securities
                
                $
                503
                
                
                $
                14
                
                
                $
                -
                
                
                $
                517U.S.
      Government sponsored entities
                
                
                54,746
                
                
                
                489
                
                
                
                74
                
                
                
                55,161Mortgage-backed
      investments
                
                
                162,647
                
                
                
                5,300
                
                
                
                72
                
                
                
                167,875Obligations
      of states and political subdivisions
                
                
                55,153
                
                
                
                1,533
                
                
                
                100
                
                
                
                56,586Collateralized
      debt obligations
                
                
                4,171
                
                
                
                -
                
                
                
                3,091
                
                
                
                1,080Other
      debt securities
                
                
                2,385
                
                
                
                101
                
                
                
                -
                
                
                
                2,486Equity
      securities
                
                
                865
                
                
                
                20
                
                
                
                40
                
                
                
                845$
                280,470
                
                
                $
                7,457
                
                
                $
                3,377
                
                
                $
                284,550March
      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
                
                
                
                64,811Collateralized
      debt obligations
                
                
                5,079
                
                
                
                -
                
                
                
                1,062
                
                
                
                4,017Other
      debt securities
                
                
                2,649
                
                
                
                5
                
                
                
                64
                
                
                
                2,590Equity
      securities
                
                
                633
                
                
                
                -
                
                
                
                55
                
                
                
                578$
                280,687
                
                
                $
                6,721
                
                
                $
                1,656
                
                
                $
                285,752


16


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Provided
below is a summary of securities available for sale which were in an unrealized
loss position and the length of time that individual securities have been in a
continuous loss position at March 31, 2010 and December 31, 2009. Securities on
which we have taken only credit-related other-than-temporary-impairment (OTTI)
write-downs are categorized as being “less than 12 months” or “12 months or
more” in a continuous loss position based on the point in time that the fair
value declined to below the amortized cost basis and not the period of time
since the OTTI write-down.





(Dollars in thousands)
                  
                  Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesMarch 31, 2010:U.S.
      Government sponsored entities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,619
                  
                  
                  $
                  85
                  
                  
                  $
                  11,619
                  
                  
                  $
                  85Mortgage-backed
      investments
                  
                  
                  38,595
                  
                  
                  
                  236
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  38,595
                  
                  
                  
                  236Obligations
      of states and political subdivisions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,290
                  
                  
                  
                  107
                  
                  
                  
                  4,290
                  
                  
                  
                  107Collateralized
      debt obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,045
                  
                  
                  
                  2,924
                  
                  
                  
                  1,045
                  
                  
                  
                  2,924Other
      debt securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equity
      securities
                  
                  
                  244
                  
                  
                  
                  7
                  
                  
                  
                  84
                  
                  
                  
                  32
                  
                  
                  
                  328
                  
                  
                  
                  39$
                  38,839
                  
                  
                  $
                  243
                  
                  
                  $
                  17,038
                  
                  
                  $
                  3,148
                  
                  
                  $
                  55,877
                  
                  
                  $
                  3,391December
      31, 2009:U.S.
      Government sponsored entities
                  
                  $
                  5,093
                  
                  
                  $
                  74
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  5,093
                  
                  
                  $
                  74Mortgage-backed
      investments
                  
                  
                  4,122
                  
                  
                  
                  71
                  
                  
                  
                  76
                  
                  
                  
                  1
                  
                  
                  
                  4,198
                  
                  
                  
                  72Obligations
      of states and political subdivisions
                  
                  
                  2,423
                  
                  
                  
                  40
                  
                  
                  
                  3,087
                  
                  
                  
                  60
                  
                  
                  
                  5,510
                  
                  
                  
                  100Collateralized
      debt obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,080
                  
                  
                  
                  3,091
                  
                  
                  
                  1,080
                  
                  
                  
                  3,091Other
      debt securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equity
      securities
                  
                  
                  350
                  
                  
                  
                  8
                  
                  
                  
                  84
                  
                  
                  
                  32
                  
                  
                  
                  434
                  
                  
                  
                  40$
                  11,988
                  
                  
                  $
                  193
                  
                  
                  $
                  4,327
                  
                  
                  $
                  3,184
                  
                  
                  $
                  16,315
                  
                  
                  $
                  3,377


17


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. At March 31, 2010
there were 9 U.S. government sponsored entity securities with unrealized losses
under 12 months in duration. There were 16 mortgage-backed securities with
unrealized losses under 12 months. There were 21 municipal securities with
unrealized losses of 12 months or longer. The unrealized losses associated with
U.S. government sponsored entity, mortgage-backed and municipal securities are
primarily driven by changes in market rates and liquidity and not due to the
credit quality of the securities. Management does not intend to sell any
investment securities that have unrealized losses before the time that those
losses could be recovered. Management has evaluated the investment securities
that have unrealized losses within the framework of the Company’s liquidity and
capital needs as well as its ability to hold those securities over an extended
recovery period. Management’s evaluation involved (1) assessing whether
significant future cash outflows would occur that would require the liquidation
of securities and (2) determining if the balance sheet would need to be managed
or reduced in a way that would require the liquidation of securities to meet
regulatory capital ratio requirements. This analysis was performed to determine
if it was more likely than not that the investments would have to be sold before
their anticipated recoveries. Management determined that it was not more likely
than not that the investments would have to be disposed of prior to their
anticipated recoveries. In estimating whether there are other-than-temporary
impairment losses on debt securities management considers (1) the length of time
and extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, (3) historical cash flows and
economic factors that could detrimentally affect those cash flows and (4)
changes in credit ratings of the issuers.





There are
five collateralized debt obligations that represent the majority of unrealized
losses in the investment portfolio. These obligations are secured by commercial
bank trust preferred securities. The impairments have arisen due to a virtual
trading halt related to the liquidity crisis in corporate debt, and the effects
of the sub-prime mortgage crisis and the resulting economic deterioration and
ongoing recession on the financial stability of financial institution issuers of
the trust preferred collateral. In December 2008, these CDOs were downgraded to
below investment grade by Moody’s. During 2008 and 2009 several banks that had
issued trust preferred securities that were held as collateral in some of the
CDOs were closed by federal regulators. These defaults and the credit
downgrades, accompanied by interest deferrals by several other bank issuers,
resulted in reductions in fair value estimates as credit assumptions had to be
revised. Two of the beneficial interests had deferred interest payments and were
placed in nonaccrual status during the second quarter of 2009 resulting in a
reversal of $84 thousand of interest income. A third beneficial interest
deferred an interest payment in October 2009 which resulted in its being placed
in nonaccrual status with a resulting $25 thousand reversal of interest income
in the fourth quarter. Management evaluated these instruments for impairment as
of each quarter end during 2009 and 2010 within the accounting guidelines for
determining impairments for beneficial interests using the discounted cash flow
approach prescribed, which required Management to make assumptions concerning
the estimates of the ultimate collectability of the contractual cash flows of
the beneficial interests owned. These estimates depend on the expected cash
flows that the beneficial interest issuer will receive on its investments in the
trust preferred securities of the commercial bank investees. The ability of the
banks that issued trust preferred securities to the beneficial interest issuer
to pay their obligations was determined based on an analysis of the financial
condition of the banks. This analysis resulted in an estimate of the timing and
amount of cash flows derived from a determination of how many would default on
their obligations and how many would eventually pay off their obligations and
the timing of those events. Those estimated cash flows would first pay off more
senior beneficial interests, with the remaining amounts flowing through to the
interests owned by the Company. Based on this type of analysis for each
beneficial interest issuer, the cash flows of each of the five beneficial
interests owned by the Company were projected and discounted to their present
values using their original yields and compared to the amortized cost book
values of the interests. This analysis resulted in a determination that
other-than-temporary impairment (OTTI) conditions existed for one of the
securities at June 30, 2009, two of the securities at September 30, 2009, three
of the securities at December 31, 2009 and two of the securities at March 31,
2010. At June 30, 2009 the credit-related portion of the impairment of $175
thousand was charged against current earnings with the remaining unrealized loss
of $218 thousand being charged to other comprehensive income. At September 30,
2009 the credit-related portions of the impairments of $237 thousand were
charged against earnings with the remaining unrealized loss of $994 thousand
being charged to other comprehensive income. At December 31, 2009 the
credit-related portions of the impairments of $417 thousand were charged against
earnings with the remaining unrealized loss of $1.486 million being charged to
other comprehensive income. At March 31, 2010 the credit-related portions of the
impairments of $202 thousand were charged against earnings with the remaining
loss of $69 thousand being charged to other comprehensive income. The unrealized
losses by individual security in the CDO portfolio as of March 31, 2010 ranged
from 68% of amortized cost to 80% of amortized cost.


18


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





The
following table provides a rollforward of the cumulative activity related to
credit losses on debt securities for which a portion of an other-than-temporary
impairment was recognized in other comprehensive income.





(Dollars in thousands)
                  
                  Three Months Ended March 312010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  829
                  
                  
                  $
                  -OTTI
      credit losses on securities not previously impaired
                  
                  
                  -
                  
                  
                  
                  -OTTI
      credit losses on previously impaired securities
                  
                  
                  202
                  
                  
                  
                  -Ending
      balance
                  
                  $
                  1,031
                  
                  
                  $
                  -





The fair
values of our investment securities could decline in the future if the
underlying performance of the collateral for the trust preferred CDOs
deteriorates and credit enhancements in the form of seniority in the cash flow
waterfalls do not provide sufficient protection to our contractual principal and
interest. As a result, there is a risk that additional OTTI may occur in the
future given the current economic environment.





The
following is a summary of gains and losses on securities available for
sale:





(Dollars
      in thousands)
                  
                  Three Months Ended March 312010
                  
                  
                  2009Proceeds
      from sales
                  
                  $
                  39,548
                  
                  
                  $
                  1,665Gross
      realized gains
                  
                  
                  1,094
                  
                  
                  
                  -Gross
      realized losses
                  
                  
                  90
                  
                  
                  
                  -Net
      gains from sales
                  
                  $
                  1,004
                  
                  
                  $
                  -Gross
      recognized losses related to the credit component of other-than-temporary
      impairments
                  
                  $
                  202
                  
                  
                  $
                  -





Securities
with a carrying value totaling $249.530 million at March 31, 2010 and $264.185
million at December 31, 2009 were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.





The
amortized cost and fair values of debt securities available for sale at March
31, 2010, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay certain obligations with, or without, call or prepayment penalties.
Equity securities are not included since they have no stated maturity.
Mortgage-backed securities receive monthly payments based on the cash flows of
the underlying collateral. Therefore, their stated maturities do not represent
the timing of principal amounts received and no maturity distributions are shown
for these securities.





Amortized
                  
                  
                  Fair(Dollars in
      thousands)
                  
                  Cost
                  
                  
                  ValueOne
      year or less
                  
                  $
                  24,448
                  
                  
                  $
                  24,581After
      one through five years
                  
                  
                  70,313
                  
                  
                  
                  71,491After
      five through ten years
                  
                  
                  18,202
                  
                  
                  
                  18,734After
      ten years
                  
                  
                  4,834
                  
                  
                  
                  1,892117,797
                  
                  
                  
                  116,698Mortgage-backed
      investments
                  
                  
                  167,186
                  
                  
                  
                  171,809$
                  284,983
                  
                  
                  $
                  288,507


19


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Derivatives





The
Company enters into interest rate lock agreements related to mortgage loan
originations with customers. The Company also enters into forward sale
agreements with mortgage investors. The interest rate lock agreements, which are
written options, and the forward sale agreements are derivatives and are carried
at fair value on the consolidated statements of condition with changes in fair
value being recorded in earnings for the period.





The
following table summarizes these instruments, which are considered derivatives
not designated as hedges:





(Dollars in thousands)
                
                March 31, 2010
                
                
                December 31, 2009Notional
                
                
                Positive
                
                
                Negative
                
                
                Notional
                
                
                Positive
                
                
                NegativeInstrument
                
                Amount
                
                
                Fair Value
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value
                
                
                Fair ValueForward
      sale agreements
                
                $
                6,166
                
                
                $
                69
                
                
                $
                -
                
                
                $
                3,895
                
                
                $
                77
                
                
                $
                -Written
      interest rate options (locks)
                
                
                7,945
                
                
                
                10
                
                
                
                11
                
                
                
                7,108
                
                
                
                8
                
                
                
                1





Derivatives
with positive fair values are recorded as other assets and derivatives with
negative fair values are recorded as other liabilities in the consolidated
statements of condition.





Amounts
included in the consolidated statements of operations related to non-hedging
mortgage banking-related derivative instruments were as follows:





(Dollars in thousands)
                  
                  Three Months Ended March 312010
                  
                  
                  2009Forward
      sale agreements:Recorded
      in mortgage banking income
                  
                  $
                  (8
                  )
                  
                  $
                  (3
                  )Written
      interest rate options (locks):Recorded
      in mortgage banking income
                  
                  
                  3
                  
                  
                  
                  (43
                  )


20


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 4:
Loans





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





(Dollars in thousands)
                
                March 31
                
                
                December 312010
                
                
                2009
                
                
                2009Commercial,
      financial and agricultural
                
                $
                123,476
                
                
                $
                132,812
                
                
                $
                120,415Non-residential
      real estate
                
                
                626,025
                
                
                
                720,783
                
                
                
                643,804Residential
      real estate
                
                
                195,862
                
                
                
                204,003
                
                
                
                195,361Home
      equity loans
                
                
                43,043
                
                
                
                45,116
                
                
                
                44,560Consumer
      loans
                
                
                44,788
                
                
                
                37,451
                
                
                
                44,586Other
      loans
                
                
                9,235
                
                
                
                9,087
                
                
                
                9,614Total
      loans
                
                $
                1,042,429
                
                
                $
                1,149,252
                
                
                $
                1,058,340





The Bank
uses loans as collateral for borrowings at the Federal Reserve Bank and a
Federal Home Loan Bank. Approximately $20.245 million of commercial and consumer
loans were pledged to a line of credit with the Federal Reserve Bank at March
31, 2010. Approximately $276.125 million of individual real estate-secured loans
were pledged to the Federal Home Loan Bank at March 31, 2010.





The
following table is a summary of the activity in the allowance for loan losses
for first three months of 2010 and 2009:





(Dollars in thousands)
                
                Three Months Ended March 312010
                
                
                2009Balance
      at January 1
                
                $
                24,014
                
                
                $
                24,918Loans
      charged off
                
                
                (5,603
                )
                
                
                (3,508
                )Charge
      offs resulting from write-downs of loans transferred to held for sale
      status
                
                
                (325
                )
                
                
                -Recoveries
                
                
                749
                
                
                
                256Net
      charge-offs
                
                
                (5,179
                )
                
                
                (3,252
                )Provision
      for loan losses
                
                
                2,280
                
                
                
                19,840Balance
      at March 31
                
                $
                21,115
                
                
                $
                41,506





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.


21


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 31,2010
                  
                  
                  2009Nonaccrual
      loans
                  
                  $
                  42,148
                  
                  
                  $
                  44,549Other
      real estate owned
                  
                  
                  31,460
                  
                  
                  
                  23,578Total
      non-performing credit-related assets
                  
                  $
                  73,608
                  
                  
                  $
                  68,127Accruing
      loans past due 90 days or more
                  
                  $
                  2,092
                  
                  
                  $
                  2,479Loans
      restructured and in compliance with modified terms
                  
                  $
                  6,759
                  
                  
                  $
                  4,620





Loans are
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due in
accordance with the original contractual terms of the loan agreement, including
scheduled principal and interest payments. If a loan is impaired, a specific
valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s
existing rate or at the fair value of the collateral if repayment is expected
solely from the collateral. Interest payments on impaired loans are typically
applied to principal unless collectability of the principal amount is reasonably
assured, in which case interest is recognized on a cash basis. Impaired loans,
or portions thereof, are charged off when deemed uncollectible. Restructured
loans are considered to be impaired loans. A troubled debt restructuring occurs
when a creditor for economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it would not otherwise
consider. That concession either stems from an agreement between the creditor
and the debtor or is imposed by law or a court.





The
following table shows an impaired loan summary for the Company:





(Dollars in thousands)
                  
                  March 31, 2010
                  
                  
                  December 31, 2009Restructured
      loans with an allowance
                  
                  $
                  5,077
                  
                  
                  $
                  3,783Other
      impaired loans with an allowance
                  
                  
                  20,662
                  
                  
                  
                  40,897Restructured
      loans without an allowance
                  
                  
                  2,352
                  
                  
                  
                  837Other
      impaired loans without an allowance
                  
                  
                  102,096
                  
                  
                  
                  94,710Total
      impaired loans
                  
                  $
                  130,187
                  
                  
                  $
                  140,227Allowance
      for restructured loans
                  
                  $
                  2,379
                  
                  
                  $
                  1,974Allowance
      for other impaired loans
                  
                  $
                  8,068
                  
                  
                  $
                  11,419





The
impaired loan totals consist primarily of collateral-dependent construction and
commercial real estate loans.


22


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 5:  Goodwill
and Other Intangible Assets





Following
is a summary of intangible assets, net of accumulated amortization, included in
the Consolidated Statements of Condition:





(Dollars in thousands)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  CustomerCore
                                  
                                  
                                  Renewal
                                  
                                  
                                  Noncompete
                                  
                                  
                                  BankingGoodwill
                                  
                                  
                                  Deposits
                                  
                                  
                                  Lists
                                  
                                  
                                  Agreements
                                  
                                  
                                  CharterBalance
      at December 31, 2008
                                  
                                  $
                                  32,572
                                  
                                  
                                  $
                                  5,865
                                  
                                  
                                  $
                                  198
                                  
                                  
                                  $
                                  39
                                  
                                  
                                  $
                                  1,025Amortization
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (107
                                  )
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  -Impairment
      charge
                                  
                                  
                                  (15,800
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (191
                                  )
                                  
                                  
                                  (32
                                  )
                                  
                                  
                                  (1,025
                                  )Balance
      at March 31, 2009
                                  
                                  $
                                  16,772
                                  
                                  
                                  $
                                  5,758
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Balance
      at December 31, 2009
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,439
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Amortization
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (106
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Impairment
      charge
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Balance
      at March 31, 2010
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,333
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Estimated amortization
    expenseRemainder
      of 2010
                                  
                                  
                                  
                                  
                                  
                                  $
                                  3212011
                                  
                                  
                                  
                                  
                                  
                                  
                                  4272012
                                  
                                  
                                  
                                  
                                  
                                  
                                  4272013
                                  
                                  
                                  
                                  
                                  
                                  
                                  4272014
                                  
                                  
                                  
                                  
                                  
                                  
                                  4272015
                                  
                                  
                                  
                                  
                                  
                                  
                                  427





Goodwill
and indefinite lived intangible assets are reviewed for impairment at least
annually or when circumstances or events indicate that an impairment may be
evident. Goodwill is tested for impairment annually during the first quarter of
each year. No amortization resulted from the impairment tests performed during
the first quarters 2009 and 2008. Due to a continued decrease in the Company’s
stock price coupled with increased first quarter loan impairments, an additional
goodwill impairment test was performed at March 31, 2009. Step 1 of the test
indicated that the net assets of the community banking unit of the Company had a
fair value of less than their book value. Therefore, Step 2 was performed to
determine if goodwill was an impaired asset in the allocation of the value of
the community banking unit through the allocation of fair values to all of the
identifiable assets and liabilities, both recorded and unrecorded, of the unit.
The completion of this step resulted in the carrying value of goodwill exceeding
its implied fair value by $15.800 million. Therefore, a goodwill impairment
charge of $15.800 million was recorded during the first quarter of 2009. An
increase in loan impairments in the fourth quarter of 2009 resulting in loan
loss provisions of $10.956 million in excess of third quarter provisions and a
decrease of over 60% in the stock price from the end of the first quarter to the
end of the year prompted the Company to test goodwill for impairment at December
31, 2009. Step 1 of the test indicated that the net assets of the community
banking unit of the Company had a fair value of less than their book value.
Therefore, Step 2 was again required to determine if the goodwill asset was
impaired. The Step 2 analysis resulted in no implied fair value for goodwill.
Therefore, the remaining goodwill asset of $16.772 million was written off as an
impairment charge during the fourth quarter of 2009.





The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. Concurrent with the March
31, 2009 test of goodwill, these intangible assets with determinable useful
lives were tested for impairment. Based on an analysis of expected cash flows,
management determined that the renewal values and the value of the noncompete
agreements were fully impaired. Therefore, the Company charged $191 thousand for
customer renewal lists and $32 thousand for noncompete agreements to intangible
asset amortization during the first quarter of 2009 to fully write off the
remaining balances of the assets.





The
Company acquired a Florida banking charter in a transaction with Ameris Bancorp
of Moultrie, Georgia, in November 2006, for $1.025 million. The charter was
being accounted for as an indefinite-lived intangible asset and therefore was
not being amortized. The banking charter is tested for impairment annually and
when circumstances arise or events occur that indicate that the asset may be
impaired. The banking charter was tested for impairment at December 31, 2008,
with no amortization being required. The banking charter was subsequently tested
as of March 31, 2009 concurrent with the goodwill impairment test. The
significant slowdown in the economy, especially in areas with historically heavy
construction activity, throughout 2008 and into 2009 affected the Company’s
ability to grow its business in the Florida panhandle. The lack of interest in
the Florida markets as a means of expansion by commercial banks and loan
impairments related to the Florida markets were key factors in determining the
value of the Florida banking charter. The charter, with a recorded value of
$1.025 million, was determined to be fully impaired and was written off in the
first quarter of 2009.


23


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 6:  Variable
Interest Entity and Borrowing Arrangements





The
following is a summary of other borrowings at March 31, 2010 and 2009 and
December 31, 2009:





(Dollars in thousands)
                
                March 31
                
                
                December 312010
                
                
                2009
                
                
                2009Company’s
      line of credit in the amount of $5,000,000, maturing in June 2010; secured
      by approximately 29% of the Bank’s common stock; interest payable
      quarterly at the prime rate with a floor of 3.50%
                
                $
                1,916
                
                
                $
                2,416
                
                
                $
                1,916Bank’s
      advances from Federal Home Loan Banks
                
                
                89,324
                
                
                
                138,108
                
                
                
                120,594$
                91,240
                
                
                $
                140,524
                
                
                $
                122,510Company’s
      junior subordinated debentures, interest payable quarterly at 6.44%
      through March 2011, payable quarterly at 90-day LIBOR plus 1.33% through
      March 2036; redeemable after March 2011
                
                $
                30,928
                
                
                $
                30,928
                
                
                $
                30,928





The
Company’s correspondent line of credit contains certain restrictive covenants
related to capital ratios, asset quality and supervisory actions by the
Company’s regulators. The Company was in violation of its capital ratio debt
covenants as of March 31, 2010. The Company executed an informal agreement with
the Federal Reserve Bank of St. Louis in November 2009, the occurrence of which
was an event of default under the Loan Agreement. The lender has agreed to a
waiver of the covenant violations and events of default until June 30,
2010.





The Bank
has advances and letters of credit from the Federal Home Loan Bank of Dallas
(FHLB) collateralized by real estate-secured loans. The Bank must pledge
collateral to obtain advances from the FHLB. Based on the amount of collateral
pledged as of March 31, 2010 the Bank had approximately $617 thousand in
available credit.





The Bank
has a line of credit with the Federal Reserve Discount Window collateralized by
commercial and consumer loans. The bank had a line of credit of approximately
$13.159 million at March 31, 2010, all of which was available.





In
February 2006, the Company issued $30.928 million in fixed/floating rate junior
subordinated deferrable interest debentures to First M&F Statutory Trust I.
The Company received $30.000 million in cash and $928 thousand of common
securities from the Trust. The debentures mature in March 2036 and interest is
payable quarterly.





First
M&F Statutory Trust I, which is a wholly owned financing subsidiary of the
Company for regulatory and legal purposes, is a variable interest entity. A
determination has been made that the Company, since its equity interest is not
at risk, is not the primary beneficiary and therefore, the Trust is not
consolidated with the Company’s financial statements.


24


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 7:  Preferred
Stock, Common Stock Warrant and Dividend





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 at any time subject to the consent of the Federal Reserve Bank
of St. Louis, which is the Company’s primary Federal banking regulator, and the
U.S. Treasury Department.





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 determined using a
discounted cash flow analysis. The fair value of the warrant was determined
using a Black-Scholes option pricing model. The preferred stock cash flows were
determined to be payments of dividends annually at a rate of 5% and a
liquidation of the $30.000 million face value at the end of five years. The
discount rate used was 25%, which seemed reasonable given market yields for
financial institution preferred stocks ranging from 15% to 30%. This resulted in
a preferred stock value of $13.864 million. The warrants were valued using an
expected life of 7.5 years (50% probability at 5 years and 50% probability at 10
years), a volatility of 27.85% (average of historical 10-year, 5-year and 1-year
volatilities of the Company’s stock), an expected dividend yield of 2.50% (50%
probability of 0% and 50% probability of 5%), and a risk-free bond rate of 2.18%
(7-year Treasury rate). The warrant fair value was determined to be $660
thousand. The $30.000 million in CPP proceeds was distributed proportionately to
the preferred stock and warrants resulting in $1.363 million being assigned to
the warrant and $28.637 million being assigned to the preferred stock. The
amount assigned to the preferred stock resulted in an effective book yield of
6.08%, given the dividend rate and discount accretion.





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 was $62 thousand during the
first three months of 2010 and $20 thousand during the first three months of
2009.


25


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 8:  Pension
and Other Employee Benefit Plans





As
discussed in Note 18 to the December 31, 2009 financial statements, the Bank has
a defined benefit pension plan covering substantially all full time employees of
the Bank and its subsidiaries. The following table provides a summary of the
components of the Unamortized Pension Costs recognized in stockholders’ equity
as of March 31, 2010 and December 31, 2009:





(Dollars
      in thousands)
                
                Balance
                
                
                2010
                
                
                Balance12/31/09
                
                
                Amortization
                
                
                03/31/10Unamortized
      transition asset
                
                $
                -
                
                
                $
                -
                
                
                $
                -Unamortized
      prior service cost
                
                
                (62
                )
                
                
                9
                
                
                
                (53
                )Unamortized
      actuarial loss
                
                
                3,538
                
                
                
                (221
                )
                
                
                3,3173,476
                
                
                
                (212
                )
                
                
                3,264Deferred
      taxes
                
                
                (1,297
                )
                
                
                79
                
                
                
                (1,218
                )Net
      unamortized pension costs
                
                $
                2,179
                
                
                $
                (133
                )
                
                $
                2,046





The
following is a summary of the components of net periodic benefit costs for the
three-month periods ended March 31, 2010 and 2009:





(Dollars in thousands)
                  
                  Three Months Ended
                    March 312010
                  
                  
                  2009Service
      cost
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      cost
                  
                  
                  117
                  
                  
                  
                  121Expected
      return on plan assets
                  
                  
                  (132
                  )
                  
                  
                  (117
                  )Amortization
      of transition asset
                  
                  
                  -
                  
                  
                  
                  (2
                  )Amortization
      of prior service costs
                  
                  
                  (9
                  )
                  
                  
                  (9
                  )Recognized
      actuarial loss
                  
                  
                  221
                  
                  
                  
                  226Net
      pension cost
                  
                  $
                  197
                  
                  
                  $
                  219





The
Company did not make any contributions to the pension plan during the first
quarters of 2009 and 2010. The Company has not determined the level of
contributions to make to the pension plan during 2010.





The
Company made no contributions to the ESOP and $75 thousand in matching
contributions to the 401k plan during the first quarter of 2010. 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 has a nonqualified deferred compensation plan for certain senior
officers. Participants deferred $17 thousand of compensation and received $17
thousand in distributions during the first three months of 2010. Participants
deferred $18 thousand of compensation and received $2 thousand in distributions
during the first three months of 2009. Employee benefit expenses include charges
for earnings increases of $17 thousand for the first three months of 2010 and
credits for earnings declines attributed to the participants’ accounts of $54
thousand for the first three months of 2009. The plan incurred $1 thousand of
expenses during the first three months of 2010 and $1 thousand during the first
three months of 2009. Liabilities of the plan were $416 thousand at March 31,
2010 and $360 thousand at March 31, 2009, substantially all of which were
vested.


26


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
9:  Share-based Compensation





The
Company uses the fair value method of accounting for stock-based compensation.
The fair value of stock options is estimated at the date of grant using the
Black-Scholes option pricing model.





The
following table is a summary of stock awards activity:





2005 Plan
                
                
                1999 PlanRestricted Stock
                
                
                Stock Options
                
                
                Stock OptionsWeightedAverageShares
                
                
                
                
                
                Grant
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedAvailable
                
                
                Number
                
                
                Date
                
                
                Number
                
                
                Average
                
                
                Number
                
                
                Averagefor
                
                
                of
                
                
                Fair
                
                
                Of
                
                
                Exercise
                
                
                Of
                
                
                ExerciseGrant
                
                
                Shares
                
                
                Value
                
                
                Shares
                
                
                Price
                
                
                Shares
                
                
                PriceJanuary
      1, 2009
                
                
                576,984
                
                
                
                106,250
                
                
                $
                16.823
                
                
                
                12,000
                
                
                $
                16.004
                
                
                
                119,900
                
                
                $
                15.995Awards
      Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Vested
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeitures
                
                
                8,000
                
                
                
                (8,000
                )
                
                
                16.855
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -March
      31, 2009
                
                
                584,984
                
                
                
                98,250
                
                
                $
                16.820
                
                
                
                12,000
                
                
                $
                16.004
                
                
                
                119,900
                
                
                $
                15.995January
      1, 2010
                
                
                596,234
                
                
                
                77,000
                
                
                $
                16.841
                
                
                
                16,000
                
                
                $
                13.288
                
                
                
                21,600
                
                
                $
                15.087Awards
      Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Vested
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeitures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -March
      31, 2010
                
                
                596,234
                
                
                
                77,000
                
                
                $
                16.841
                
                
                
                16,000
                
                
                $
                13.288
                
                
                
                21,600
                
                
                $
                15.087Shares
      exercisable at March 31, 2010
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                4,000
                
                
                $
                17.219
                
                
                
                20,200
                
                
                $
                14.881





The
Company estimates a forfeiture rate of 9.45% (1.89% annual rate) for stock
options issued to employees and a forfeiture rate of 5.45% (1.09% annual rate)
for stock options issued to directors in determining net compensation costs. At
March 31, 2010, there were $21 thousand in unrecognized compensation costs
related to stock option awards.





The
Company has issued restricted stock awards to certain executives and senior
officers. The awards vest over periods of one to seven years and are forfeited
in their entirety if the officer leaves the Company before the end of the
vesting term. Additionally the restricted shares include a performance condition
that may accelerate vesting at the achievement of a diluted earnings per share
and net income target. Non-achievement of the performance condition during the
vesting period would not prevent vesting of the shares. Dividends are paid
quarterly to restricted stock grantees. At March 31, 2010, there were $542
thousand in unrecognized compensation costs. The unrecognized costs at March 31,
2010, are expected to be recognized over a weighted-average period of 3.2 years.
The Company estimates that 4.00% (.57% annual rate) of the nonvested shares will
be forfeited in determining net compensation expenses recognized. 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. In
May 2009, 6,000 shares of restricted stock with a fair value of $26 thousand
became fully vested and outstanding.


27


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
10:  Accumulated Other Comprehensive Income





The
following is a summary of the gross amounts of accumulated other comprehensive
income and the related income tax effects:





(Dollars in
      thousands)
                
                Gross
                
                
                Tax
                
                
                NetMarch
      31, 2010:Net
      unrealized gain on securities available for sale
                
                $
                6,272
                
                
                $
                2,340
                
                
                $
                3,932Net
      unrealized loss on other-than-temporarily impaired securities available
      for sale
                
                
                (2,767
                )
                
                
                (1,032
                )
                
                
                (1,735
                )Net
      unamortized pension costs
                
                
                (3,264
                )
                
                
                (1,218
                )
                
                
                (2,046
                )$
                241
                
                
                $
                90
                
                
                $
                151December
      31, 2009:Net
      unrealized gain on securities available for sale
                
                $
                6,778
                
                
                $
                2,529
                
                
                $
                4,249Net
      unrealized loss on other-than-temporarily impaired securities available
      for sale
                
                
                (2,698
                )
                
                
                (1,007
                )
                
                
                (1,691
                )Net
      unamortized pension costs
                
                
                (3,476
                )
                
                
                (1,297
                )
                
                
                (2,179
                )$
                604
                
                
                $
                225
                
                
                $
                379March
      31, 2009:Net
      unrealized gain on securities available for sale
                
                $
                5,065
                
                
                $
                (1,890
                )
                
                $
                3,175Net
      unamortized pension costs
                
                
                (4,207
                )
                
                
                (1,570
                )
                
                
                (2,637
                )$
                858
                
                
                $
                (320
                )
                
                $
                538





Note
11:  Regulatory Matters





The
Company and its subsidiary bank are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, specific capital
requirements that involve quantitative measures of assets, liabilities and
certain off-balance-sheet items, calculated under regulatory accounting
practices must be met. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table below) of
Total Capital and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined). Management believes, as of March 31, 2010, that all capital
adequacy requirements have been met.





As of
March 31, 2010, the most recent notification by the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.


28


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
11:  (Continued)





The
Company's and Bank's actual capital amounts and ratios as of March 31, 2010, and
December 31, 2009, are also presented in the table:





(Dollars in thousands)
                
                Actual
                
                
                Minimum Capital
                
                
                Well CapitalizedAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioMarch
      31, 2010:Total
      capital (to risk weighted assets):Company
                
                $
                134,008
                
                
                
                11.3
                %
                
                $
                95,237
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                -Bank
                
                
                132,436
                
                
                
                11.1
                %
                
                
                95,154
                
                
                
                8.0
                %
                
                
                118,942
                
                
                
                10.0
                %Tier
      I capital (to risk weighted assets):Company
                
                
                119,037
                
                
                
                10.0
                %
                
                
                47,618
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                117,491
                
                
                
                9.9
                %
                
                
                47,577
                
                
                
                4.0
                %
                
                
                71,365
                
                
                
                6.0
                %Tier
      I capital (to average assets):Company
                
                
                119,037
                
                
                
                7.3
                %
                
                
                64,903
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                117,491
                
                
                
                7.2
                %
                
                
                64,877
                
                
                
                4.0
                %
                
                
                81,096
                
                
                
                5.0
                %December
      31, 2009:Total
      capital (to risk weighted assets):Company
                
                $
                133,574
                
                
                
                11.1
                %
                
                $
                96,374
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                -Bank
                
                
                130,960
                
                
                
                10.9
                %
                
                
                96,293
                
                
                
                8.0
                %
                
                
                120,366
                
                
                
                10.0
                %Tier
      I capital (to risk weighted assets):Company
                
                
                118,405
                
                
                
                9.8
                %
                
                
                48,187
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                115,803
                
                
                
                9.6
                %
                
                
                48,147
                
                
                
                4.0
                %
                
                
                72,220
                
                
                
                6.0
                %Tier
      I capital (to average assets):Company
                
                
                118,405
                
                
                
                7.1
                %
                
                
                66,346
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                115,803
                
                
                
                7.0
                %
                
                
                66,339
                
                
                
                4.0
                %
                
                
                82,924
                
                
                
                5.0
                %





Dividends
paid by the Bank are the primary source of funds available to the Company for
payment of dividends to its shareholders and other cash needs. Applicable
Federal and state statutes and regulations impose restrictions on the amounts of
dividends that may be declared by the Bank. The Bank may also be restricted in
its ability to pay dividends due to regulatory violations cited in an
examination. In addition to the formal statutes and regulations, regulatory
authorities also consider the Bank’s ability to produce current earnings and the
adequacy of the Bank's total capital in relation to its assets, deposits and
other such items, and as a result, capital adequacy considerations could further
limit the availability of dividends from the Bank.





The Bank
is required to get prior approval from its primary regulators, the Federal
Deposit Insurance Corporation and the State of Mississippi Department of Banking
and Consumer Finance, to pay dividends to the Company. Said approval was denied
for the first quarter of 2010 due to the Bank’s operating losses, but was
tentatively approved for the second quarter of 2010 based on the current year’s
positive earnings of the Bank.





In
February 2009 the Company entered into a transaction with the Department of the
Treasury under the TARP Capital Purchase Program.  Under the terms of
the Securities Purchase Agreement, for three (3) years following closing, or
until Treasury no longer holds any shares of the Senior Preferred, the Company
will not be able to increase dividends above $0.13 per share of common stock on
a quarterly basis nor repurchase any of its shares without Treasury approval,
with limited exceptions, most significantly purchases in connection with benefit
plans.





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


29


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 12:  Income
Taxes





Income
tax expense was as follows:





(Dollars in thousands)
                  
                  Three Months Ended March 31,2010
                  
                  
                  2009Current
      income tax expense
                  
                  $
                  17
                  
                  
                  $
                  553Deferred
      income tax expense (benefit)
                  
                  
                  284
                  
                  
                  
                  (7,145
                  )Total
      income tax expense (benefit)
                  
                  $
                  301
                  
                  
                  $
                  (6,592
                  )





Net
deferred tax assets totaled $15.071 million at March 31, 2010 and $15.219
million at December 31, 2009. No valuation allowance has been accrued for the
deferred tax assets at March 31, 2010 as management believes that it is more
likely than not that all of the deferred tax assets will be realized in the
foreseeable future.





In
connection with its 2009 operating loss, the Company had the following net
operating losses and tax credits available for carryover for Federal income tax
purposes at December 31, 2009:





(Dollars in thousands)Amount
                  
                  
                  Expiration DatesNet
      operating loss
                  
                  $
                  21,162
                  
                  
                  
                  2029Tax
      credits
                  
                  
                  150
                  
                  
                  2029





As a
result of an audit of its state tax returns for the years 2005 through 2007 by
the Mississippi State Tax Commission, the Company paid $217 thousand in
assessments in February 2010. The amount paid, included in current income tax
expense, included $163 thousand in assessments and $54 thousand in interest. The
primary issues related to (1) the apportionment of taxable income between state
jurisdictions and (2) the excludable nature of interest income on certain
investment securities issued by Federal government sponsored enterprises. The
change in the calculation of apportioned revenues resulted in amendments of
returns filed with the state of Tennessee. The amended returns related to
Tennessee resulted in refunds receivable for 2005 through 2007 of $129 thousand,
leaving the Company with a net tax expense of $88 thousand related to the
assessment.





The
Company had no material recognized uncertain tax positions as of March 31, 2010,
December 31, 2009 or March 31, 2009 and therefore did not have any tax accruals
in 2010 or 2009 related to uncertain positions.


30


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 13:  Earnings
(Loss) Per Share





The
Company calculates earnings per share using the two-class method. The two-class
method is an earnings allocation formula that determines earnings per share
separately for common stock and participating securities according to dividends
declared and participation rights in undistributed earnings. The Company has
determined that its outstanding non-vested restricted stock awards are
participating securities.





The
calculation of earnings (loss) per share and the reconciliation of earnings
(loss) per share and earnings (loss) per diluted share were as
follows:





(Dollars in thousands, except per share data)
                    
                    Three Months Ended March 312010
                    
                    
                    2009Net
      income (loss)
                    
                    $
                    853
                    
                    
                    $
                    (27,241
                    )Preferred
      dividends
                    
                    
                    437
                    
                    
                    
                    154Net
      income (loss) attributable to common stock
                    
                    
                    416
                    
                    
                    
                    (27,395
                    )Net
      income (loss) allocated to common stockholders:Distributed
                    
                    
                    91
                    
                    
                    
                    1,178Undistributed
                    
                    
                    322
                    
                    
                    
                    (28,267
                    )$
                    413
                    
                    
                    $
                    (27,089
                    )Weighted-average
      basic common and participating shares outstanding
                    
                    
                    9,146,346
                    
                    
                    
                    9,165,507Less:
      weighted average participating restricted shares
    outstanding
                    
                    
                    77,000
                    
                    
                    
                    102,161Weighted-average
      basic shares outstanding
                    
                    
                    9,069,346
                    
                    
                    
                    9,063,346Basic
      net income (loss) per share
                    
                    $
                    .05
                    
                    
                    $
                    (2.99
                    )Weighted-average
      basic common and participating shares outstanding
                    
                    
                    9,146,346
                    
                    
                    
                    9,165,507Add:
      share-based options and stock warrant
                    
                    
                    -
                    
                    
                    
                    -9,146,346
                    
                    
                    
                    9,165,507Less:
      weighted average participating restricted shares
    outstanding
                    
                    
                    77,000
                    
                    
                    
                    102,161Weighted-average
      dilutive shares outstanding
                    
                    
                    9,069,346
                    
                    
                    
                    9,063,346Dilutive
      net income (loss) per share
                    
                    $
                    .05
                    
                    
                    $
                    (2.99
                    )Weighted-average
      shares of potentially dilutive instruments that are not included in the
      dilutive share calculation due to anti-dilutive effect:Compensation
      plan-related stock options
                    
                    
                    37,600
                    
                    
                    
                    135,500Common
      stock warrant
                    
                    
                    513,113
                    
                    
                    
                    188,141


31


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.


32


FIRST M
& F CORPORATION





Financial
Summary





Net
income for the first quarter of 2010 was $853 thousand, or $.05 basic and
diluted earnings per share as compared to a net loss of $27.241 million, or
$2.99 basic and diluted loss per share for the same period in 2009 and a net
loss of $27.311 million or $3.03 basic and diluted loss per share for the fourth
quarter of 2009. Major factors contributing to the increase in year-over-year
earnings were (1) a decrease of $17.560 million in loan loss accruals as
compared to 2009 and (2) a decrease of $17.632 million in noninterest expenses
as compared to 2009 as a result of a goodwill impairment charge of $15.800
million during the first quarter of 2009 and additional intangible asset
impairment charges of $1.248 million during the first quarter of
2009.





Highlights
for the first three months of 2010 and 2009 are as follows:





·
            The
      Company received $30.000 million in February 2009 from the U. S. Treasury
      for preferred stock and a stock warrant as a participant in the U. S.
      Treasury’s TARP Capital Purchase
Program


·
            Debit
      card revenues increased by 9.74% over the first quarter of
      2009


·
            The
      net interest margin decreased to 3.16% in the first quarter of 2010 from
      3.28% in the fourth quarter of 2009 and 3.33% in the first quarter of
      2009


·
            Loans
      held for investment decreased by $15.911 million during the first quarter
      of 2010 and by $27.343 million during the first quarter of
      2009


·
            Nonaccrual
      loans were 4.01% of total loans at March 31, 2010 as compared to 4.17% at
      December 31, 2009 and 4.51% at March 31,
2009


·
            Annualized
      net charge-offs were 1.99% for the first quarter of 2010 as compared to
      8.87% for the fourth quarter of 2009 and 1.13% for the first quarter of
      2009


·
            Closed
      a full-service branch in Memphis, Tennessee in February
    2010


·
            Closed
      a full-service branch in Germantown, Tennessee in February
      2010


·
            Closed
      a full-service branch in Birmingham, Alabama in February
    2010


·
            Closed
      a full-service branch in Collierville, Tennessee in February
      2009


33


FIRST M
& F CORPORATION





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





(Net change, in
thousands)


Non-Interest
                      
                      
                      InterestLoans
                      
                      
                      Bearing Deposits
                      
                      
                      Bearing Deposits1st
      Qtr 2009
                      
                      $
                      (27,343
                      )
                      
                      $
                      12,697
                      
                      
                      $
                      39,0762nd
      Qtr 2009
                      
                      
                      (41,511
                      )
                      
                      
                      (10,223
                      )
                      
                      
                      6,6103rd
      Qtr 2009
                      
                      
                      (8,633
                      )
                      
                      
                      15,835
                      
                      
                      
                      31,4344th
      Qtr 2009
                      
                      
                      (40,768
                      )
                      
                      
                      31,580
                      
                      
                      
                      (134
                      )1st
      Qtr 2010
                      
                      
                      (15,911
                      )
                      
                      
                      (10,896
                      )
                      
                      
                      (3,369
                      )





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 2009
                      
                      $
                      11,844
                      
                      
                      $
                      19,840
                      
                      
                      $
                      5,188
                      
                      
                      $
                      31,0412nd
      Qtr 2009
                      
                      
                      11,265
                      
                      
                      
                      9,195
                      
                      
                      
                      4,976
                      
                      
                      
                      15,8153rd
      Qtr 2009
                      
                      
                      12,298
                      
                      
                      
                      4,805
                      
                      
                      
                      5,381
                      
                      
                      
                      14,1404th
      Qtr 2009
                      
                      
                      12,187
                      
                      
                      
                      15,761
                      
                      
                      
                      4,425
                      
                      
                      
                      34,8761st
      Qtr 2010
                      
                      
                      11,241
                      
                      
                      
                      2,280
                      
                      
                      
                      5,603
                      
                      
                      
                      13,409





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





1st Qtr
                      2010
                    
                    
                    4th Qtr
                      2009
                    
                    
                    3rd Qtr
                      2009
                    
                    
                    2nd Qtr
                      2009
                    
                    
                    1st Qtr
                      2009Net
      interest income
                    
                    $
                    1.24
                    
                    
                    $
                    1.34
                    
                    
                    $
                    1.36
                    
                    
                    $
                    1.24
                    
                    
                    $
                    1.31Loan
      loss expense
                    
                    
                    .25
                    
                    
                    
                    1.74
                    
                    
                    
                    .53
                    
                    
                    
                    1.01
                    
                    
                    
                    2.19Noninterest
      income
                    
                    
                    .62
                    
                    
                    
                    .49
                    
                    
                    
                    .59
                    
                    
                    
                    .55
                    
                    
                    
                    .57Noninterest
      expense
                    
                    
                    1.48
                    
                    
                    
                    1.99
                    
                    
                    
                    1.56
                    
                    
                    
                    1.74
                    
                    
                    
                    3.42Net
      income (loss) before taxes
                    
                    $
                    .13
                    
                    
                    $
                    (1.90
                    )
                    
                    $
                    (.14
                    )
                    
                    $
                    (.96
                    )
                    
                    $
                    (3.73
                    )


34





FIRST M
& F CORPORATION





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





1st Qtr 2010
                      
                      
                      4th Qtr 2009
                      
                      
                      3rd Qtr 2009
                      
                      
                      2ndQtr 2009
                      
                      
                      1stQtr 2009Net
      interest margin
                      
                      
                      3.16
                      %
                      
                      
                      3.28
                      %
                      
                      
                      3.40
                      %
                      
                      
                      3.16
                      %
                      
                      
                      3.33
                      %Efficiency
      ratio
                      
                      
                      78.16
                      
                      
                      
                      106.73
                      
                      
                      
                      78.34
                      
                      
                      
                      95.10
                      
                      
                      
                      80.41Return
      on assets
                      
                      
                      .21
                      
                      
                      
                      (6.46
                      )
                      
                      
                      (.03
                      )
                      
                      
                      (1.27
                      )
                      
                      
                      (6.71
                      )Return
      on  total equity
                      
                      
                      3.28
                      
                      
                      
                      (81.32
                      )
                      
                      
                      (.40
                      )
                      
                      
                      (14.84
                      )
                      
                      
                      (73.59
                      )Return
      on common equity
                      
                      
                      2.20
                      
                      
                      
                      (105.37
                      )
                      
                      
                      (2.13
                      )
                      
                      
                      (20.40
                      )
                      
                      
                      (81.82
                      )Noninterest
      income to avg. assets
                      
                      
                      1.39
                      
                      
                      
                      1.05
                      
                      
                      
                      1.30
                      
                      
                      
                      1.24
                      
                      
                      
                      1.28Noninterest
      incometo
      revenues (1)
                      
                      
                      32.66
                      
                      
                      
                      26.09
                      
                      
                      
                      29.81
                      
                      
                      
                      29.92
                      
                      
                      
                      29.81Noninterest
      expense to avg assets
                      
                      
                      3.32
                      
                      
                      
                      8.25
                      
                      
                      
                      3.41
                      
                      
                      
                      3.94
                      
                      
                      
                      7.65Salaries
      and benefits to totalnoninterest
      expense
                      
                      
                      50.89
                      
                      
                      
                      19.35
                      
                      
                      
                      50.25
                      
                      
                      
                      46.15
                      
                      
                      
                      23.07Contribution
      margin (2)
                      
                      
                      60.22
                      
                      
                      
                      60.22
                      
                      
                      
                      60.64
                      
                      
                      
                      56.11
                      
                      
                      
                      58.85Nonaccrual
      loans to loans
                      
                      
                      4.01
                      
                      
                      
                      4.17
                      
                      
                      
                      6.24
                      
                      
                      
                      6.69
                      
                      
                      
                      4.5190
      day past due loans to loans
                      
                      
                      .20
                      
                      
                      
                      .23
                      
                      
                      
                      .57
                      
                      
                      
                      .50
                      
                      
                      
                      .12Annualized
      net charge offs as apercent
      of average loans
                      
                      
                      1.99
                      
                      
                      
                      8.87
                      
                      
                      
                      1.24
                      
                      
                      
                      6.87
                      
                      
                      
                      1.13


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


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





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





(Dollars in
      thousands)
                  
                  1st Qtr 2010
                  
                  
                  4th Qtr 2009
                  
                  
                  3rd Qtr 2009
                  
                  
                  2nd Qtr 2009
                  
                  
                  1st Qtr 2009Mortgage
      originations
                  
                  $
                  17,847
                  
                  
                  $
                  17,925
                  
                  
                  $
                  23,386
                  
                  
                  $
                  32,438
                  
                  
                  $
                  23,992Trust
      revenues
                  
                  
                  59
                  
                  
                  
                  47
                  
                  
                  
                  52
                  
                  
                  
                  51
                  
                  
                  
                  57Retail
      investment revenues
                  
                  
                  62
                  
                  
                  
                  70
                  
                  
                  
                  68
                  
                  
                  
                  85
                  
                  
                  
                  59Revenues
      per FTE employee
                  
                  
                  34
                  
                  
                  
                  34
                  
                  
                  
                  34
                  
                  
                  
                  31
                  
                  
                  
                  32Agency
      commissions per agencyFTE
      employee (1)
                  
                  
                  24
                  
                  
                  
                  21
                  
                  
                  
                  28
                  
                  
                  
                  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 2010
                  
                  
                  4th Qtr 2009
                  
                  
                  3rd Qtr 2009
                  
                  
                  2nd Qtr 2009
                  
                  
                  1st Qtr 2009Full-time
      equivalent employees
                  
                  
                  499
                  
                  
                  
                  512
                  
                  
                  
                  523
                  
                  
                  
                  529
                  
                  
                  
                  535Number
      of noninterest-bearingdeposit
      accounts
                  
                  
                  33,209
                  
                  
                  
                  33,289
                  
                  
                  
                  33,811
                  
                  
                  
                  34,116
                  
                  
                  
                  34,509




35





FIRST M
& F CORPORATION





Net
Interest Income





Net
interest income before loan loss expenses for the first quarter of 2010 was
$11.241 million as compared to $11.844 million for the first quarter of 2009 and
$12.187 million for the fourth quarter of 2009. For the first quarter of 2010
compared to the same quarter of 2009: earning asset yields decreased by 61 basis
points, liability costs decreased by 51 basis points, the net interest spread
decreased by 11 basis points and the net interest margin decreased by 17 basis
points. For the first quarter of 2010 compared to the fourth quarter of 2009:
earning asset yields decreased by 16 basis points, liability costs decreased by
9 basis points, the net interest spread decreased by 8 basis points and the net
interest margin decreased by 12 basis points.





Balance
sheet dynamics affecting the comparative net interest margins for the first
quarter of 2010 compared to 2009 include (1) a decrease of 9.35% in average
loans held for investment, (2) a decrease in average loans as a percentage of
earning assets from 78.40% in the first quarter of 2009 to 71.30% in the first
quarter of 2010, (3) an increase in average interest-bearing deposits of 3.70%,
(4) a decrease in average other borrowings of 25.16% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 10.95%
in 2009 to 13.01% in 2010.





Balance
sheet dynamics affecting the comparative net interest margins for the first
quarter of 2010 compared to the fourth quarter of 2009 include (1) a decrease of
3.43% in average loans held for investment, (2) a decrease in average loans as a
percentage of earning assets from 72.03% in the fourth quarter of 2009 to 71.30%
in the first quarter of 2010, (3) an increase in average interest-bearing
deposits of .98%, (4) a decrease in average other borrowings of 19.34% and (5)
an increase in average noninterest-bearing deposits as a percentage of total
assets from 12.29% in the fourth quarter of 2009 to 13.01% in the first quarter
of 2010.





Yield and
cost dynamics affecting the comparative net interest margins for the first
quarter of 2010 compared to 2009 include (1) a decrease of 11 basis points in
yields on loans held for investment and for sale, (2) a decrease of 147 basis
points in investment and short-term funds yields, (3) a decrease of 50 basis
points in costs of deposits and (4) a decrease of 2 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the first
quarter of 2010 compared to the fourth quarter of 2009 include (1) a decrease of
14 basis points in yields on loans held for investment and for sale, (2) a
decrease of 17 basis points in investment and short-term funds yields, (3) a
decrease of 7 basis points in costs of deposits and (4) an increase of 17 basis
points in costs of borrowings.





Net
interest income was down by 5.09% compared to the first quarter of 2009, with
the net interest margin decreasing to 3.16% on a tax equivalent basis in the
first quarter of 2010 as compared to 3.33% in the first quarter of 2009. The
most significant contributor to the decrease in net interest income and the
squeeze in the margin was the changing balance sheet mix as average loans fell
and were replaced by a lower yielding mix of assets. Lower loan yields in the
continuing low-rate environment and the higher level of average non-performing
assets were secondary contributors.  The net interest margin for the
fourth quarter of 2009 was 3.28% as compared to 3.40% for the third quarter of
2009 and 3.16% for the second quarter of 2009. Loan yields decreased to 5.90% in
the first quarter of 2010 from 6.01% in the first quarter of 2009. Loan yields
also decreased from the fourth quarter of 2009 to the first quarter. Average
total loans were $1.068 billion for the first quarter of 2010 as compared to
$1.103 billion for the fourth quarter of 2009 and $1.174 billion during the
first quarter of 2009. Loans decreased by $15.911 million in the first quarter
of 2010 and fell by $40.768 million in the fourth quarter of
2009.  Deposit costs decreased in the first quarter of 2010 from the
fourth quarter of 2009 continuing a trend in declining deposit costs dating back
to the fourth quarter of 2007 as costs reflected Fed rate cuts through the
fourth quarter of 2008 and the low-rate environment since then. Deposit costs
were 1.80% in the first quarter of 2010 as compared to 2.30% in the first
quarter of 2009. Deposits fell by $14.265 million, or 1.03% during the first
quarter of 2010. Management plans to continue to focus on core deposit growth
for 2010 to offset the influence that the low rate environment may have on the
net interest margin. Loans as a percentage of assets were 64.22% at March 31,
2010 as compared to 70.10% at March 31, 2009 and 63.64% at December 31, 2009.
Loans fell by 9.30% since the first quarter of 2009 while deposits grew by
4.63%.





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


36





FIRST M
& F CORPORATION





The
following table shows the components of the net interest margin for the first
quarters of 2010 and 2009 and the fourth quarters of 2009 and 2008:





Yields/Costs
                
                
                Yields/Costs1st Quarter, 2010
                
                
                4th Quarter, 2009
                
                
                1st Quarter, 2009
                
                
                4th Quarter, 2008Interest
      bearing bank balances
                
                
                0.22
                %
                
                
                0.20
                %
                
                
                0.16
                %
                
                
                0.56
                %Federal
      funds sold
                
                
                0.21
                
                
                
                0.20
                
                
                
                0.22
                
                
                
                0.78Taxable
      investments
                
                
                3.51
                
                
                
                3.69
                
                
                
                4.92
                
                
                
                5.23Tax-exempt
      investments
                
                
                5.98
                
                
                
                5.91
                
                
                
                6.07
                
                
                
                6.13Loans
      held for sale
                
                
                2.76
                
                
                
                3.71
                
                
                
                3.56
                
                
                
                4.44Loans
      held for investment
                
                
                5.93
                
                
                
                6.06
                
                
                
                6.03
                
                
                
                6.44Earning
      asset yield
                
                
                5.02
                
                
                
                5.18
                
                
                
                5.63
                
                
                
                6.17Interest
      checking
                
                
                1.07
                
                
                
                1.18
                
                
                
                1.37
                
                
                
                1.49Money
      market deposits
                
                
                1.08
                
                
                
                1.14
                
                
                
                1.70
                
                
                
                2.25Savings
                
                
                1.33
                
                
                
                1.36
                
                
                
                1.65
                
                
                
                2.02Certificates
      of deposit
                
                
                2.50
                
                
                
                2.54
                
                
                
                3.04
                
                
                
                3.30Short-term
      borrowings
                
                
                0.56
                
                
                
                0.56
                
                
                
                1.31
                
                
                
                2.08Other
      borrowings
                
                
                4.80
                
                
                
                4.45
                
                
                
                4.60
                
                
                
                4.47Cost
      of interest-bearing liabilities
                
                
                2.09
                
                
                
                2.18
                
                
                
                2.60
                
                
                
                2.90Net
      interest spread
                
                
                2.92
                
                
                
                3.00
                
                
                
                3.03
                
                
                
                3.27Effect
      of non-interest bearing deposits
                
                
                .29
                
                
                
                .29
                
                
                
                .31
                
                
                
                .35Effect
      of leverage
                
                
                (.05
                )
                
                
                (.01
                )
                
                
                (.01
                )
                
                
                (.02
                )Net
      interest margin, tax-equivalent
                
                
                3.16
                
                
                
                3.28
                
                
                
                3.33
                
                
                
                3.60Less:
      Tax equivalent adjustments:Investments
                
                
                .07
                
                
                
                .08
                
                
                
                .09
                
                
                
                .09Loans
                
                
                .01
                
                
                
                .02
                
                
                
                .01
                
                
                
                .01Reported
      book net interest margin
                
                
                3.08
                %
                
                
                3.18
                %
                
                
                3.23
                %
                
                
                3.50
                %





The
following table shows average balance sheets for the first quarters of 2010 and
2009 and the fourth quarters of 2009 and 2008:





(Dollars
in thousands)





1st Quarter, 2010
                
                
                4th Quarter, 2009
                
                
                1st Quarter, 2009
                
                
                4th Quarter, 2008Interest
      bearing bank balances
                
                $
                81,226
                
                
                $
                59,852
                
                
                $
                16,195
                
                
                $
                9,086Federal
      funds sold
                
                
                49,848
                
                
                
                65,479
                
                
                
                44,819
                
                
                
                19,568Taxable
      investments
                
                
                236,038
                
                
                
                237,842
                
                
                
                191,111
                
                
                
                161,999Tax-exempt
      investments
                
                
                46,541
                
                
                
                52,275
                
                
                
                59,875
                
                
                
                57,598Loans
      held for sale
                
                
                11,506
                
                
                
                9,229
                
                
                
                8,987
                
                
                
                5,208Loans
      held for investment
                
                
                1,056,177
                
                
                
                1,093,694
                
                
                
                1,165,086
                
                
                
                1,196,806Earning
      assets
                
                
                1,481,336
                
                
                
                1,518,371
                
                
                
                1,486,073
                
                
                
                1,450,265Other
      assets
                
                
                157,425
                
                
                
                158,133
                
                
                
                159,482
                
                
                
                161,179Total
      assets
                
                $
                1,638,761
                
                
                $
                1,676,504
                
                
                $
                1,645,555
                
                
                $
                1,611,444Interest
      checking
                
                
                330,094
                
                
                
                296,806
                
                
                
                263,716
                
                
                
                214,154Money
      market deposits
                
                
                147,128
                
                
                
                169,439
                
                
                
                172,747
                
                
                
                179,120Savings
      deposits
                
                
                112,260
                
                
                
                112,482
                
                
                
                114,655
                
                
                
                114,742Certificates
      of deposit
                
                
                576,885
                
                
                
                576,285
                
                
                
                573,580
                
                
                
                568,279Short-term
      borrowings
                
                
                13,733
                
                
                
                10,036
                
                
                
                10,163
                
                
                
                13,127Other
      borrowings
                
                
                131,820
                
                
                
                163,422
                
                
                
                176,133
                
                
                
                194,655Interest-bearing
      liabilities
                
                
                1,311,920
                
                
                
                1,328,470
                
                
                
                1,310,994
                
                
                
                1,284,077Noninterest-bearing
      deposits
                
                
                213,143
                
                
                
                206,037
                
                
                
                180,207
                
                
                
                178,088Other
      liabilities
                
                
                8,114
                
                
                
                8,757
                
                
                
                4,226
                
                
                
                7,949Stockholders’
      equity
                
                
                105,584
                
                
                
                133,240
                
                
                
                150,128
                
                
                
                141,330Liabilities
      and stockholders’ equity
                
                $
                1,638,761
                
                
                $
                1,676,504
                
                
                $
                1,645,555
                
                
                $
                1,611,444Loans
      to earning assets
                
                
                71.30
                %
                
                
                72.03
                %
                
                
                78.40
                %
                
                
                82.52
                %Loans
      to assets
                
                
                64.45
                %
                
                
                65.24
                %
                
                
                70.80
                %
                
                
                74.27
                %Earning
      assets to assets
                
                
                90.39
                %
                
                
                90.57
                %
                
                
                90.31
                %
                
                
                90.00
                %Noninterest-bearing
      deposits to assets
                
                
                13.01
                %
                
                
                12.29
                %
                
                
                10.95
                %
                
                
                11.05
                %Equity
      to assets
                
                
                6.44
                %
                
                
                7.95
                %
                
                
                9.12
                %
                
                
                8.77
                %




37





FIRST M
& F CORPORATION





Provision
for Loan Losses





The
accrual for the provision for loan losses for the first quarter of 2010 was
$2.280 million as compared to $19.840 million for the first quarter of 2009. Net
charge-offs were $5.179 million for the first quarter of 2010 as compared to
$3.252 million for the first quarter of 2009. The allowance for loan losses as a
percentage of loans was 2.03% at March 31, 2010, 2.27% at December 31, 2009, and
3.61% at March 31, 2009.





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




Non
Interest Income





Noninterest
income, excluding securities transactions, for the first quarter of 2010 was
$4.801 million as compared to $5.188 million for the same period in 2009 and
$4.828 million in the fourth quarter of 2009. For the first quarter of 2010 as
compared to the first quarter of 2009: (1) deposit revenues decreased by $42
thousand, (2) mortgage banking revenues decreased by $25 thousand and (3) agency
commissions decreased by $73 thousand. For the first quarter of 2010 as compared
to the fourth quarter of 2009: (1) deposit revenues decreased by $358 thousand,
(2) mortgage banking revenues decreased by $52 thousand and (3) agency
commissions increased by $42 thousand.





The first
quarter of 2010 showed a decrease of 1.67% from the first quarter of 2009 and a
12.61% decrease from the fourth quarter of 2009 in deposit revenues. Overdraft
fee revenues, which comprise approximately 61% of deposit revenues, decreased by
5.27% from the first quarter of 2009 to the first quarter of 2010 and decreased
by 15.75% from the fourth quarter of 2009 to the first quarter of 2010. The
decline in the first quarter of 2010 from the first quarter of 2009 was due to
decreased item volumes. The decrease in the first quarter of 2010 from the
fourth quarter of 2009 was also due to decreased item volumes. Overdraft fees
are per item charges applied to each check paid on an overdrawn account or
returned. The per item fee is determined by the Company’s pricing committee and
is based primarily on the competitive market prices as well as on costs
associated with processing the items. The majority of the volumes of overdraft
items processed come from customers in the Company’s overdraft protection
program which grants overdraft limits to customers, generally allows account
activity up to the overdraft limit balance, and requires that accounts have
positive balances at some point within a thirty day period. Overdrafts are
considered loans for accounting purposes and therefore are subject to the
Company’s loan accounting policies concerning the charging off of accounts to
the allowance for loan losses. Interest charged on overdrawn balances, based on
the Federal discount rate, is recorded as interest on loans. The overdraft
protection program is designed to help customers with their cash flow needs and
is not extended to individuals who are poor credit risks. Debit card revenues
increased by 9.74% from the first quarter of 2009 to the first quarter of 2010
and decreased by 6.95% from the fourth quarter of 2009 to the first quarter of
2010.





The
Company sold $19.942 million of mortgage-backed securities and $5.387 million of
municipal bonds for gains of approximately $1.090 million during the first
quarter of 2010. The proceeds from the sale of the mortgage-backed securities,
coupled with payments received from mortgage-backed securities, were redeployed
back into the mortgage-backed portfolio. The proceeds from sales and maturities
of municipal bonds and calls of U.S. government sponsored enterprise bonds were
reinvested into securities of U.S. government sponsored enterprises, most of
which had three to five year maturities.


38





FIRST M
& F CORPORATION





Management
expects overdraft fee revenues to continue to be a significant component of
deposit revenues and expects to see debit card revenues and transaction activity
continue to grow through the remainder of 2010. The Federal Reserve has issued a
regulatory change, effective July 1, 2010, prohibiting banks from charging fees
for paying overdrafts on automated teller machine and one-time debit card
transactions unless the customer consents, or opts in, to the overdraft service
for those types of transactions. Management estimates that, without mitigating
efforts, overdraft fee revenues could decline by as much as 10% on an annual
basis. However, management plans to implement customer education and other
mitigating programs that could limit the decline in revenues to approximately 2%
on an annual basis. The following table shows the components of deposit account
income:





Three Months Ended(Dollars in thousands)
                
                March 312010
                
                
                2009Service
      charge revenues
                
                $
                323
                
                
                $
                336Debit/ATM
      card revenues
                
                
                635
                
                
                
                579Overdraft
      fee revenues
                
                
                1,522
                
                
                
                1,607Service
      charges on deposit accounts
                
                $
                2,480
                
                
                $
                2,522





Mortgage
banking income decreased by 6.79% from the first quarter of 2009 to the first
quarter of 2010 and decreased by 13.16% from the fourth quarter of 2009 to the
first quarter of 2010. Mortgage originations decreased by 25.61% from the first
quarter of 2009 to the first quarter of 2010 and decreased by .44% from the
fourth quarter of 2009 to the first quarter of 2010. For 2009 mortgage rates hit
their peak in June at 5.59%. Rates continued to slowly decrease, hitting their
low point of 4.71% in December. Mortgage rates during the first quarter of 2010
stayed within a range of 4.93% to 5.09%. The first quarter of 2010 showed a loss
of momentum in refinancing that had driven much of the 2009 performance. During
the first quarter of 2010 approximately 51.66% of originations were for
refinancing purposes while for the calendar year 2009 approximately 69.27% of
originations were for refinancing purposes. The Federal Reserve ended its
program of purchasing mortgage-backed securities as of March 31, 2010. This
policy move, coupled with a weak economy and the ending of the first-time home
buyer tax credit could keep mortgage origination volume down for the foreseeable
future.





Agency
commission income decreased by 7.52% from the first quarter of 2009 to the first
quarter of 2010 and increased by 4.91% from the fourth quarter of 2009 to the
first quarter of 2010. For the first quarter of 2010 as compared to the first
quarter of 2009, property, casualty, health and life commissions decreased by
6.45%. Insurance commission revenues are expected to be influenced by economic
activity, as consumers and businesses alike are reducing spending.





The
Company owns certain beneficial interests in collateralized debt obligations
that own bank trust preferred securities. These beneficial interests are tested
for impairment on a quarterly basis. Two of the beneficial interests, Trapeza I
and MM Community Funding IX failed impairment tests at March 31, 2010. The
Trapeza I beneficial interest failed an impairment test at June 30, 2009 while
the  MM Community Funding IX beneficial interest failed an impairment
test at September 30, 2009 due primarily to collateral defaults and the
subordinate position of the interests as compared to other senior securities in
the CDOs. Management determined that the credit-related portion of the first
quarter 2010 impairments was $202 thousand with the remaining impairment being
$69 thousand. The credit-related portion of the impairments were classified as
other-than-temporary impairments and charged against earnings during the first
quarter of 2010 while the remaining $69 thousand other-than-temporary impairment
was charged to other comprehensive income in the statement of
condition.





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





As of March 31, 2010(Dollars in thousands)
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        Deferrals andMoody’s
                                        
                                        Number of
                                        
                                        Defaults asBook
                                        
                                        Fair
                                        
                                        Unrealized
                                        
                                        Credit
                                        
                                        Banks in
                                        
                                        a Percent
                                        
                                        
                                        ExcessName of Issuer
                                        
                                        Class
                                        
                                        Value
                                        
                                        Value
                                        
                                        Loss
                                        
                                        Rating
                                        
                                        Issuance
                                        
                                        of Collateral
                                        
                                        
                                        SubordinationTrapeza
      I 2002-1A
                                        
                                        C1
                                        
                                        $
                                        474
                                        
                                        $
                                        101
                                        
                                        $
                                        373
                                        
                                        Ca
                                        
                                        25
                                        
                                        43.09
                                        %
                                        
                                        0.00
                                        %Trapeza
      II 2003-2A
                                        
                                        C1
                                        
                                        
                                        1,050
                                        
                                        
                                        279
                                        
                                        
                                        771
                                        
                                        Ca
                                        
                                        37
                                        
                                        33.36
                                        
                                        
                                        3.01Tpref
      Funding II
                                        
                                        B
                                        
                                        
                                        887
                                        
                                        
                                        250
                                        
                                        
                                        637
                                        
                                        Caa3
                                        
                                        34
                                        
                                        33.31
                                        
                                        
                                        0.00Trapeza
      V 2003-5A
                                        
                                        C1
                                        
                                        
                                        833
                                        
                                        
                                        181
                                        
                                        
                                        652
                                        
                                        Ca
                                        
                                        43
                                        
                                        26.09
                                        
                                        
                                        5.42MM
      Community Funding IX
                                        
                                        B1
                                        
                                        
                                        725
                                        
                                        
                                        234
                                        
                                        
                                        491
                                        
                                        Caa3
                                        
                                        34
                                        
                                        38.04
                                        
                                        
                                        0.00$
                                        3,969
                                        
                                        $
                                        1,045
                                        
                                        $
                                        2,924




39





FIRST M
& F CORPORATION





Significant
components of other income for the first quarters of 2010 and 2009 and the
fourth quarters of 2009 and 2008 are contained in the following
table:





(Dollars in thousands)
                        
                        1Q2010
                        
                        
                        4Q2009
                        
                        
                        1Q2009
                        
                        
                        4Q2008Agency
      profit-sharing revenues
                        
                        $
                        233
                        
                        
                        $
                        -
                        
                        
                        $
                        425
                        
                        
                        $
                        18Loan
      fees
                        
                        
                        100
                        
                        
                        
                        93
                        
                        
                        
                        110
                        
                        
                        
                        26Gains
      on student loan sales
                        
                        
                        93
                        
                        
                        
                        26
                        
                        
                        
                        73
                        
                        
                        
                        10All
      other income
                        
                        
                        363
                        
                        
                        
                        503
                        
                        
                        
                        486
                        
                        
                        
                        468Total
      other income
                        
                        $
                        789
                        
                        
                        $
                        622
                        
                        
                        $
                        1,094
                        
                        
                        $
                        522





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





The
Company has a strategy to increase noninterest revenues as a proportion of total
revenues over time. Noninterest revenues as a percentage of total revenues
increased from 29.81% in the first quarter of 2009 to 32.66% in the first
quarter of 2010, and increased from 26.09% in the fourth quarter of 2009 to
32.66% in the first quarter of 2010. Another metric that the Company monitors is
revenues per full-time employee, which were approximately $34 thousand per
employee for the first quarter of 2010 and $33 thousand per employee for the
fourth quarter of 2009 as compared to $32 thousand for the first quarter of 2009
and $33 thousand for the fourth quarter of 2008. Insurance product revenues per
producer remained fairly constant at $24 thousand per producer for the first
quarter of 2010 as compared to $25 thousand per producer for the first quarter
of 2009. Management’s strategic focus is to improve revenues generated per
employee while maintaining stability in revenue growth by increasing the mix of
noninterest revenues to total revenues.


40





FIRST M
& F CORPORATION





Non
Interest Expense





Noninterest
expenses decreased by 56.81% from the first quarter of 2009 to the first quarter
of 2010 and decreased by 61.55% from the fourth quarter of 2009 to the first
quarter of 2010. Excluding goodwill and other intangible asset impairment
charges of $17.048 million in the first quarter of 2009 and $16.772 million in
the fourth quarter of 2009, noninterest expenses decreased by 4.19% from the
first quarter of 2009 to the first quarter of 2010 and decreased by 25.93% from
the fourth quarter of 2009 to the first quarter of 2010.





Salary
and benefit expenses, which comprise approximately 50% of noninterest expenses,
decreased by 4.71% from the first quarter of 2009 to the first quarter of 2010
and increased by 1.14% from the fourth quarter of 2009 to the first quarter of
2010. The number of full-time equivalent employees was 499 at March 31, 2010,
512 at December 31, 2009, 535 at March 31, 2009, and 543 at December 31, 2008.
Foreclosed property expenses increased significantly in 2009 over 2008
commensurate with an increase in other real estate foreclosures beginning in the
second half of 2008. Management expects expenses and losses related to
foreclosed properties to continue to be a significant expense through
2010.





The
components of foreclosed property expenses for the first quarters of 2010 and
2009 and the fourth quarters of 2009 and 2008 are contained in the following
table:





(Dollars in thousands)
                          
                          1Q2010
                          
                          
                          4Q2009
                          
                          
                          1Q2009
                          
                          
                          4Q2008Losses
      on sales of other real estate
                          
                          $
                          15
                          
                          
                          $
                          682
                          
                          
                          $
                          470
                          
                          
                          $
                          47Write-downs
      of other real estate
                          
                          
                          197
                          
                          
                          
                          3,178
                          
                          
                          
                          60
                          
                          
                          
                          771Other
      real estate expenses
                          
                          
                          310
                          
                          
                          
                          637
                          
                          
                          
                          228
                          
                          
                          
                          294Rental
      income on other real estate properties
                          
                          
                          (66
                          )
                          
                          
                          (4
                          )
                          
                          
                          (2
                          )
                          
                          
                          (6
                          )Total
      foreclosed property expenses
                          
                          $
                          456
                          
                          
                          $
                          4,493
                          
                          
                          $
                          756
                          
                          
                          $
                          1,106





FDIC
insurance assessments increased by 77.73% from the first quarter of 2009 to the
first quarter of 2010 and increased by 18.99% from the fourth quarter of 2009 to
the first quarter of 2010. The primary cause of the increase for the first
quarter of 2009 to the first quarter of 2010 was an increase in assessment rates
as the Company moved into a higher risk assessment category during the third
quarter of 2009. The increase from the fourth quarter of 2009 to the first
quarter of 2010 was due primarily to an increase in the balances of average
assessable deposits.





Significant
components of other expense for the first quarters of 2010 and 2009 and the
fourth quarters of 2009 and 2008 are contained in the following
table:





(Dollars in thousands)
                        
                        1Q2010
                        
                        
                        4Q2009
                        
                        
                        1Q2009
                        
                        
                        4Q2008Postage
      and shipping
                        
                        $
                        227
                        
                        
                        $
                        224
                        
                        
                        $
                        243
                        
                        
                        $
                        232Supplies
                        
                        
                        162
                        
                        
                        
                        179
                        
                        
                        
                        227
                        
                        
                        
                        216Legal
      expenses
                        
                        
                        251
                        
                        
                        
                        638
                        
                        
                        
                        137
                        
                        
                        
                        281Other
      professional expenses
                        
                        
                        339
                        
                        
                        
                        377
                        
                        
                        
                        126
                        
                        
                        
                        335Insurance
      expenses
                        
                        
                        238
                        
                        
                        
                        238
                        
                        
                        
                        223
                        
                        
                        
                        225Debit
      card processing expenses
                        
                        
                        166
                        
                        
                        
                        184
                        
                        
                        
                        182
                        
                        
                        
                        176All
      other expenses
                        
                        
                        1,285
                        
                        
                        
                        1,777
                        
                        
                        
                        1,320
                        
                        
                        
                        1,486Total
      other expense
                        
                        $
                        2,668
                        
                        
                        $
                        3,617
                        
                        
                        $
                        2,458
                        
                        
                        $
                        2,951




41





FIRST M
& F CORPORATION





Goodwill
Impairment





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





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





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


42





FIRST M
& F CORPORATION





Intangible
asset impairments





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





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





Income
Taxes





The
average tax rate for the first quarter of 2010 was 26.06%. The Company paid
approximately $217 thousand in assessments related to an audit of its
Mississippi returns for the tax years 2005 through 2007. The effect of the
assessment on income tax expense, net of resulting refunds due from other state
jurisdictions for the same tax years, was $88 thousand.





Due to a
significant addition to the provision for loan losses, a non-tax deductible
goodwill impairment charge and other intangible asset impairments the Company
incurred pre-tax losses and accrued an income tax benefit for the first quarter
of 2009. The $6.592 million tax benefit for 2009 includes a deferred tax benefit
of $7.144 million and a current tax expense of $552 thousand. At March 31, 2010,
the Company had a current tax benefit receivable of $9.489 million and a
deferred tax asset of $15.071 million. Over the past five years prior to 2009
the Company had paid annual federal taxes ranging from $3.500 million to $5.200
million. Management expects that the current tax benefits generated due to the
2008 and 2009 credit-related losses will be realized either through carry-backs
to prior tax years or through carry-forwards. Management has also reviewed its
deferred tax assets and determined that it is more likely than not that the
deferred tax assets will be realized and therefore no valuation allowance has
been accrued. The Company expects to utilize the tax benefits implicit in the
deferred tax asset in the foreseeable future when (1) current tax benefits
increase as losses are realized through loan charge-offs and collateral
foreclosures and dispositions and (2) future earnings become sufficient to
absorb the deductions. The following table shows the earnings, tax effect and
effects on tax rates of the loan loss accrual and the primarily non-tax
deductible goodwill and other impairment charges separate from the remaining
statement of operations items on the first quarter of 2009’s financial
results:





IntangibleAsset andBefore
                        
                        
                        Goodwill
                        
                        
                        Loan LossImpairments and
                        
                        
                        Impairment
                        
                        
                        Accrual
                        
                        
                        Loss as(Dollars in thousands)
                        
                        Loan Loss Accrual
                        
                        
                        Effect
                        
                        
                        Effect
                        
                        
                        DisclosedNet
      income (loss) before tax
                        
                        $
                        3,039
                        
                        
                        $
                        (17,048
                        )
                        
                        $
                        (19,840
                        )
                        
                        $
                        (33,849
                        )Income
      taxes
                        
                        
                        891
                        
                        
                        
                        (83
                        )
                        
                        
                        (7,400
                        )
                        
                        
                        (6,592
                        )Net
      income (loss) beforenoncontrolling
      interests
                        
                        $
                        2,148
                        
                        
                        $
                        (16,965
                        )
                        
                        $
                        (12,440
                        )
                        
                        $
                        (27,257
                        )Effective
      tax rate beforenoncontrolling
      interests
                        
                        
                        29.32
                        %
                        
                        
                        .49
                        %
                        
                        
                        37.30
                        %
                        
                        
                        19.47
                        %





Excluding
the effect of $562 thousand in tax-exempt securities income and $117 thousand in
non-taxable corporate-owned insurance revenues, the first quarter 2009 average
tax rate for earnings before impairments and loan loss accruals was
36.89%.





The
Company had no material recognized uncertain tax positions as of March 31, 2009
or 2010 and therefore did not have any tax accruals during the first quarters of
2009 or 2010 related to uncertain positions.


43





FIRST M
& F CORPORATION





Assets
and Liabilities





Assets
decreased by .99% from March 31, 2009 to March 31, 2010, and decreased by 2.40%
from December 31, 2009. Investments increased by 1.26% from March 31, 2009 to
March 31, 2010, and increased by 1.69% from December 31, 2009. The Company sold
$19.942 million of mortgage-backed securities and $5.387 million of municipal
bonds for gains of approximately $1.090 million during the first quarter of
2010. The proceeds from the sale of the mortgage-backed securities, coupled with
payments received from mortgage-backed securities, were redeployed back into the
mortgage-backed portfolio. The proceeds from sales of and additional maturities
of municipal bonds were reinvested into securities of U.S. government sponsored
enterprises. Liquidity primarily provided by Federal funds sold was used to pay
down maturing Federal Home Loan Bank borrowings of approximately $31.270 million
during the first quarter of 2010. Construction and commercial real
estate-related loans decreased during the first quarter of 2010 due to (1)
management’s continued efforts to cure or remove problem loans, (2) low loan
demand and (3) a marketing emphasis on other types of loans. The Company
continued its late 2009 marketing campaign for automobile loans into the first
quarter of 2010 with net growth for the first quarter of $424 thousand. Net
growth in automobile loans for the calendar year 2009 was $5.688 million. The
diversification of the loan portfolio should continue as management has re-
emphasized small business lending with plans to add lenders with small business
and SBA expertise in the future. Loans held for investment decreased by 9.30%
from March 31, 2009 to March 31, 2010, and decreased by 1.50% from December 31,
2009. Management expects that the loan portfolio’s change in size over the next
year will depend on the volume of real estate-related and other problem loans
that are moved out of the portfolio as well as the strength of the economy as it
relates to consumer and small business loans. Loans as a percent of total assets
were 64.22% at March 31, 2010, 63.64% at December 31, 2009, and 70.10% at March
31, 2009.





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





(Dollars in thousands)
                      
                      March 31, 2010
                      
                      
                      December 31, 2009
                      
                      
                      March 31, 2009Commercial
      real estate
                      
                      $
                      626,025
                      
                      
                      $
                      643,804
                      
                      
                      $
                      720,783Residential
      real estate
                      
                      
                      195,862
                      
                      
                      
                      195,361
                      
                      
                      
                      204,003Home
      equity lines
                      
                      
                      43,043
                      
                      
                      
                      44,560
                      
                      
                      
                      45,116Commercial,
      financial and agricultural
                      
                      
                      123,476
                      
                      
                      
                      120,415
                      
                      
                      
                      132,812Consumer
                      
                      
                      44,788
                      
                      
                      
                      44,586
                      
                      
                      
                      37,451Other
      loans
                      
                      
                      9,235
                      
                      
                      
                      9,614
                      
                      
                      
                      9,087Total
                      
                      $
                      1,042,429
                      
                      
                      $
                      1,058,340
                      
                      
                      $
                      1,149,252Mortgages
      held for sale
                      
                      $
                      4,558
                      
                      
                      $
                      3,118
                      
                      
                      $
                      4,443Student
      loans held for sale
                      
                      
                      4,140
                      
                      
                      
                      7,148
                      
                      
                      
                      1,623




44





FIRST M
& F CORPORATION





Deposits
increased by 4.63% from March 31, 2009 to March 31, 2010, and decreased by 1.03%
from December 31, 2009. The following table shows the breakdown by deposit
category of core deposit and public funds deposit changes from December 31, 2009
to March 31, 2010:





Core Customers
                
                
                Public Funds
                
                
                Total Deposits(Dollars in thousands)
                
                Increase (Decrease)
                
                
                Increase (Decrease)
                
                
                Increase (Decrease)Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.Noninterest-bearing
                
                $
                (18,256
                )
                
                
                (8.62
                )%
                
                $
                7,360
                
                
                
                43.61
                %
                
                $
                (10,896
                )
                
                
                (4.77
                )%NOW
                
                
                6,145
                
                
                
                2.99
                
                
                
                15,376
                
                
                
                14.75
                
                
                
                21,521
                
                
                
                6.95MMDA
                
                
                (4,641
                )
                
                
                (3.55
                )
                
                
                (15,726
                )
                
                
                (51.07
                )
                
                
                (20,367
                )
                
                
                (12.61
                )Savings
                
                
                638
                
                
                
                0.57
                
                
                
                (35
                )
                
                
                (12.64
                )
                
                
                603
                
                
                
                (0.53
                )Customer
      CDs
                
                
                (1,116
                )
                
                
                (0.22
                )
                
                
                (3,757
                )
                
                
                (9.38
                )
                
                
                (4,873
                )
                
                
                (0.88
                )Brokered
      CDs
                
                
                (987
                )
                
                
                (6.66
                )
                
                
                734
                
                
                
                17.23
                
                
                
                (253
                )
                
                
                (1.33
                )Total
                
                $
                (18,217
                )
                
                
                (1.53
                )%
                
                $
                3,952
                
                
                
                2.01
                %
                
                $
                (14,265
                )
                
                
                (1.03
                )%





Noninterest-bearing
deposits decreased during the first quarter of 2010 while total deposits
decreased by approximately the same amount. NOW deposits increased and money
market deposits decreased in almost equal amounts. The decrease in
noninterest-bearing deposits was primarily concentrated in non-public core
customer accounts. However, noninterest-bearing deposits represented 15.84% of
total deposits at March 31, 2010 as compared to 14.57% at March 31, 2009.
Consumers have been less willing to spend and more concerned about saving and
conserving cash since the economic crisis unfolded beginning in 2008. This shift
in consumer priorities has resulted in much core deposit growth across the
banking landscape through 2009 and into 2010. Balances in the interest-bearing
Summit Checking account, the sales leader for 2009, increased by $9.023 million
during the first quarter of 2010 after increasing by $27.479 million during the
calendar year 2009 and by $15.467 million during the first quarter of 2009. The
Summit Checking account is designed to pay a premium deposit rate if the
customer meets certain criteria related to electronic banking and debit card
transaction activity. Summit accounts are classified as NOW accounts. Although
the Company became less aggressive in its rate-bidding process for deposits of
municipalities, checking and transaction account balances for these entities
increased during the first quarter of 2010. The Company’s long-term strategy is
to build the core customer deposit base and rely less on borrowed funds as a
primary source of liquidity. A source of deposits available to the Company is
the brokered CD market which is used when funding is needed within a short
period of time. Additionally, when borrowed funds are less costly than time
deposits or brokered deposits, the Company may still look to those sources to
help maintain the spread between the yield on earning assets and the cost of
funds.





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





(Dollars in thousands)
                  
                  March 31, 2010
                  
                  
                  December 31, 2009
                  
                  
                  March 31, 2009Noninterest-bearing
      demand
                  
                  $
                  217,683
                  
                  
                  $
                  228,579
                  
                  
                  $
                  191,386NOW
      deposits
                  
                  
                  331,066
                  
                  
                  
                  309,545
                  
                  
                  
                  283,521Money
      market deposits
                  
                  
                  141,203
                  
                  
                  
                  161,570
                  
                  
                  
                  179,313Savings
      deposits
                  
                  
                  113,367
                  
                  
                  
                  112,764
                  
                  
                  
                  114,529Certificates
      of deposit
                  
                  
                  551,860
                  
                  
                  
                  556,733
                  
                  
                  
                  528,529Brokered
      certificates of deposit
                  
                  
                  18,819
                  
                  
                  
                  19,072
                  
                  
                  
                  15,882Total
                  
                  $
                  1,373,998
                  
                  
                  $
                  1,388,263
                  
                  
                  $
                  1,313,160





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





(Dollars in thousands)
                  
                  March 31, 2010
                  
                  
                  December 31, 2009
                  
                  
                  March 31, 2009Noninterest-bearing
      demand
                  
                  $
                  24,237
                  
                  
                  $
                  16,877
                  
                  
                  $
                  11,408NOW
      deposits
                  
                  
                  119,623
                  
                  
                  
                  104,247
                  
                  
                  
                  95,847Money
      market deposits
                  
                  
                  15,067
                  
                  
                  
                  30,793
                  
                  
                  
                  34,150Savings
      deposits
                  
                  
                  242
                  
                  
                  
                  277
                  
                  
                  
                  470Certificates
      of deposit
                  
                  
                  36,315
                  
                  
                  
                  40,072
                  
                  
                  
                  56,782Brokered
      certificates of deposit
                  
                  
                  4,995
                  
                  
                  
                  4,261
                  
                  
                  
                  2,974Total
                  
                  $
                  200,479
                  
                  
                  $
                  196,527
                  
                  
                  $
                  201,631




45





FIRST M
& F CORPORATION





Other
borrowings decreased by $49.284 million from March 31, 2009 to March 31, 2010
and by $31.270 million from December 31, 2009. The decreases in borrowings were
primarily funded through liquidity provided by deposit growth and loan portfolio
paydowns. Amounts of borrowings maturing within one year decreased from 62.20%
of other borrowings at December 31, 2009 to 50.56% at March 31, 2010. Management
intends to allow borrowings to decrease as they mature while deposits are used
as a primary source of funding.





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





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





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





Equity





The
Company’s and Bank’s regulatory capital ratios at March 31, 2010, as disclosed
in Note 11 to the financial statements, “Regulatory Matters,” are in excess of
the minimum requirements and qualify the institution as “well capitalized” under
the risk-based capital regulations.





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





The
Company issued 30,000 shares of Class B, Series A Preferred Stock and a warrant
for 513,113 shares of common stock with an exercise price of $8.77 on February
27, 2009 to the U. S. Treasury under the provisions of the TARP Capital Purchase
Program for total proceeds of $30.000 million. Approximately $28.637 million of
the proceeds were allocated to the preferred stock with the remaining $1.363
million being allocated to additional paid-in capital for the common stock
warrant. The preferred stock is treated as Tier 1 capital for risk-based capital
measurement purposes. Management believes that the Capital Purchase Program
proceeds have served and will continue to serve as an excellent source of
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
Capital Purchase Program proceeds were used primarily to inject additional
capital into the Company’s bank subsidiary. The acquisition of these funds has
served, and will continue to serve, (1) to increase the Company’s capital
position, (2) to provide liquidity for the Company’s and bank subsidiary’s
operations and debt service obligations and (3) to act as a buffer against the
effects on capital of future unpredictable events.





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 at any time, subject to the consent of the Federal Reserve Bank
of St. Louis, which is the Company’s primary Federal banking regulator, and the
U.S. Treasury Department.


46





FIRST M
& F CORPORATION





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





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





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





The
Company's stock is publicly traded on the NASDAQ Global Select Market, also
providing an avenue for additional capital if it is needed. The Company’s shares
traded at a rate of approximately 8,000 shares per day during 2009. The stock
price was listed at $3.15 on March 31, 2010.





The ratio
of capital to assets stood at 6.46% at March 31, 2010, 6.29% at December 31,
2009, and 8.46% at March 31, 2009, with risk-based capital ratios in excess of
the regulatory requirements. The Company’s regulatory capital ratios for 2010
and 2009 are summarized in Note 11 – Regulatory Matters of the financial
statements included in Item 1, Financial Statements (unaudited)  in
this Form 10-Q.





Interest
Rate Risk and Liquidity Management





Responsibility
for managing the Company’s program for controlling and monitoring interest rate
risk and liquidity risk and for maintaining income stability, given the
Company’s exposure to changes in interest rates, is vested in the
asset/liability committee. Appropriate policy and guidelines, approved by the
board of directors, govern these actions. Monitoring is primarily accomplished
through monthly reviews and analysis of asset and liability repricing
opportunities, market conditions and expectations for the economy. Cash flow
analyses are also used to project short-term interest rate risks and liquidity
risks. Management believes, at March 31, 2010, there is adequate flexibility to
alter the current rate and maturity structures as necessary to minimize the
exposure to changes in interest rates, should they occur. The Company is
currently in a negative 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
liabilities to reprice than the amount of assets 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.


47





FIRST M
& F CORPORATION





Credit
Risk Management





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





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





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


48





FIRST M
& F CORPORATION





The
Company experienced a large increase in the amount of past due and non-accrual
real estate-secured construction and commercial loans during 2008, a trend which
continued through 2009. The trend in nonaccrual and past due loans stabilized in
the fourth quarter of 2009 and first quarter of 2010.  Management
addressed the problem of liquidating nonperforming loans by creating a special
problem asset group within the organization in 2009, separate from the ongoing
credit operations and lending activities of the Company. Problem loans,
including large nonaccrual loans, have been assigned to this group of
specialists with the intent of liquidating the loans or their collateral in an
orderly fashion. Over the course of 2009 and into 2010 many real estate-secured
loans were worked out or foreclosed on and properties disposed of. This group
will continue to work out problem loans and market foreclosed other real estate
for the foreseeable future.





Approximately
68.37% of the $42.148 million in nonaccrual loans at March 31, 2010 were in
construction and development and commercial real estate loans. These nonaccrual
balances consisted of several large loans rather than a great many small
loans.





The
following table summarizes the number and amount of nonaccrual construction and
land development loans of $500 thousand or more at the end of each quarter from
March 31, 2009 through March 31, 2010.





(Dollars in thousands)





Number of Loans
                    
                    
                    AmountBalance
      at 03/31/09
                    
                    
                    12
                    
                    
                    $
                    29,114Balance
      at 06/30/09
                    
                    
                    21
                    
                    
                    
                    36,932Balance
      at 09/30/09
                    
                    
                    20
                    
                    
                    
                    36,050Balance
      at 12/31/09
                    
                    
                    13
                    
                    
                    
                    19,297Balance
      at 03/31/10
                    
                    
                    10
                    
                    
                    
                    14,980





The
following table summarizes the number and amount of nonaccrual commercial real
estate loans of $500 thousand or more at the end of each quarter from March 31,
2009 through March 31, 2010.





(Dollars in thousands)





Number of Loans
                    
                    
                    AmountBalance
      at 03/31/09
                    
                    
                    3
                    
                    
                    $
                    10,988Balance
      at 06/30/09
                    
                    
                    6
                    
                    
                    
                    17,314Balance
      at 09/30/09
                    
                    
                    7
                    
                    
                    
                    7,595Balance
      at 12/31/09
                    
                    
                    2
                    
                    
                    
                    3,496Balance
      at 03/31/10
                    
                    
                    5
                    
                    
                    
                    7,419




49





FIRST M
& F CORPORATION





The
following tables list construction and commercial real estate loans, along with
their impairment allowances, that were in non-accrual status and had balances of
$500 thousand or more at March 31, 2010.





Ten Largest Construction Loans(Dollars in thousands)
                          
                          Non-accrual
                          
                          
                          Charged Off
                          
                          
                          Charged Off
                          
                          
                          ImpairmentNote, Market
                          
                          Balance
                          
                          
                          Prior to 2010
                          
                          
                          In 2010
                          
                          
                          Allowance1.
      Niceville, FL
                          
                          $
                          2,600
                          
                          
                          $
                          1,478
                          
                          
                          $
                          -
                          
                          
                          $
                          -2.
      Inverness, AL
                          
                          
                          1,999
                          
                          
                          
                          1,419
                          
                          
                          
                          -
                          
                          
                          
                          -3.
      Oxford, MS
                          
                          
                          1,960
                          
                          
                          
                          2,675
                          
                          
                          
                          -
                          
                          
                          
                          -4.
      Inverness, AL
                          
                          
                          1,832
                          
                          
                          
                          -
                          
                          
                          
                          468
                          
                          
                          
                          -5.
      Madison, MS
                          
                          
                          1,760
                          
                          
                          
                          142
                          
                          
                          
                          -
                          
                          
                          
                          -6.
      Niceville, FL
                          
                          
                          1,465
                          
                          
                          
                          2,675
                          
                          
                          
                          -
                          
                          
                          
                          -7.
      Inverness, AL
                          
                          
                          1,400
                          
                          
                          
                          1,020
                          
                          
                          
                          -
                          
                          
                          
                          -8.
      Madison, MS
                          
                          
                          803
                          
                          
                          
                          515
                          
                          
                          
                          -
                          
                          
                          
                          -9.
      Brandon, MS
                          
                          
                          586
                          
                          
                          
                          115
                          
                          
                          
                          -
                          
                          
                          
                          -10.
      Niceville, FL
                          
                          
                          575
                          
                          
                          
                          -
                          
                          
                          
                          87
                          
                          
                          
                          -Totals
                          
                          $
                          14,980
                          
                          
                          $
                          10,039
                          
                          
                          $
                          555
                          
                          
                          $
                          -





Five Largest Commercial Real Estate Loans(Dollars in thousands)
                      
                      Non-accrual
                      
                      
                      Charged Off
                      
                      
                      Charged Off
                      
                      
                      ImpairmentNote, Market
                      
                      Balance
                      
                      
                      Prior to 2010
                      
                      
                      In 2010
                      
                      
                      Allowance11.
      Brandon, MS
                      
                      $
                      2,935
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -12.
      Niceville, FL
                      
                      
                      2,700
                      
                      
                      
                      -
                      
                      
                      
                      1,360
                      
                      
                      
                      -13.
      Olive Branch, MS
                      
                      
                      670
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7014.
      Niceville, FL
                      
                      
                      598
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -15.
      Southaven, MS
                      
                      
                      516
                      
                      
                      
                      428
                      
                      
                      
                      -
                      
                      
                      
                      -Totals
                      
                      $
                      7,419
                      
                      
                      $
                      428
                      
                      
                      $
                      1,360
                      
                      
                      $
                      70




50





FIRST M
& F CORPORATION





The
following table summarizes information relevant to the impairment determinations
for the ten largest construction and development loans and the five largest
commercial real estate loans that were in non-accrual status at March 31,
2010.





Non-accrual
                              
                              Impairment
                              
                              Information(Dollars in thousands)
                              
                              Type of
                              
                              Type of
                              
                              Balance
                              
                              Allowance
                              
                              SupportingNote, Market
                              
                              Borrower
                              
                              Collateral
                              
                              03/31/10
                              
                              03/31/10
                              
                              Allowance1.
      Niceville, FL
                              
                              Commercial
      Developer
                              
                              Vacant
      Land
                              
                              $
                              2,600
                              
                              $
                              -
                              
                              Appraisal
      dated 08/14/092.
      Inverness, AL
                              
                              Commercial
      Developer
                              
                              Commercial
      Subdivision
                              
                              
                              1,999
                              
                              
                              -
                              
                              Appraisal
      dated 02/11/093.
      Oxford, MS
                              
                              Residential
      Developer
                              
                              Condominium
                              
                              
                              1,960
                              
                              
                              -
                              
                              Appraisal
      dated 02/17/094.
      Inverness, AL
                              
                              Commercial
      Developer
                              
                              Commercial
                              
                              
                              1,832
                              
                              
                              -
                              
                              Appraisal
      dated 05/19/095.
      Madison, MS
                              
                              Commercial
      Developer
                              
                              Commercial
      Subdivision
                              
                              
                              1,760
                              
                              
                              -
                              
                              Appraisal
      dated 06/01/096.
      Niceville, FL
                              
                              Residential
      Developer
                              
                              Residential
      Subdivision
                              
                              
                              1,465
                              
                              
                              -
                              
                              Appraisal
      dated 10/03/087.
      Inverness, AL
                              
                              Commercial
      Developer
                              
                              Commercial
                              
                              
                              1,400
                              
                              
                              -
                              
                              Appraisal
      dated 09/21/098.
      Madison, MS
                              
                              Residential
      Developer
                              
                              Residential
      Subdivision
                              
                              
                              803
                              
                              
                              -
                              
                              Appraisal
      dated 09/30/099.
      Brandon,  MS
                              
                              Commercial
      Developer
                              
                              Vacant
      Land
                              
                              
                              586
                              
                              
                              -
                              
                              Appraisal
      dated 03/28/0710.
      Niceville, FL
                              
                              Residential
      Developer
                              
                              Spec
      House and Lot
                              
                              
                              575
                              
                              
                              -
                              
                              Appraisal
      dated 08/18/0911.
      Brandon, MS
                              
                              Commercial
                              
                              Commercial
      Property
                              
                              
                              2,935
                              
                              
                              -
                              
                              Appraisal
      dated 03/04/0912.
      Niceville, FL
                              
                              Commercial
                              
                              Commercial
      Property
                              
                              
                              2,700
                              
                              
                              -
                              
                              Appraisal
      dated 02/24/1013.
      Olive Branch, MS
                              
                              Commercial
                              
                              Commercial
      Property
                              
                              
                              670
                              
                              
                              70
                              
                              Appraisal
      dated 01/12/1014.
      Niceville, FL
                              
                              Commercial
                              
                              Commercial
      Property
                              
                              
                              598
                              
                              
                              -
                              
                              Appraisal
      dated 01/30/0915.
      Southaven,  MS
                              
                              Commercial
                              
                              Commercial
      Property
                              
                              
                              516
                              
                              
                              -
                              
                              Appraisal
      dated
09/17/08





Additions
to the impairment allowance and the non-accrual loan balances in 2009 occurred
primarily in construction and land development loans. Many of these loans were
foreclosed on during 2009 and into 2010. Many remaining nonaccrual loans were
written down to their collateral values, resulting in a small allowance for loan
losses remaining for nonaccrual loans at the end of 2009 and at March 31,
2010.


51





FIRST M
& F CORPORATION





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





March 31, 2010
                  
                  
                  December 31, 2009(Dollars in thousands)
                  
                  Loan
                  
                  
                  Impairment
                  
                  
                  Loan
                  
                  
                  ImpairmentBalance
                  
                  
                  Allowance
                  
                  
                  Balance
                  
                  
                  AllowanceNon-accrual
      loans
                  
                  $
                  20,363
                  
                  
                  $
                  27
                  
                  
                  $
                  25,655
                  
                  
                  $
                  36Accruing
      loans with an allowance
                  
                  
                  10,941
                  
                  
                  
                  4,798
                  
                  
                  
                  16,646
                  
                  
                  
                  6,028Accruing
      loans without an allowance
                  
                  
                  13,412
                  
                  
                  
                  -
                  
                  
                  
                  11,758
                  
                  
                  
                  -Total
                  
                  $
                  44,716
                  
                  
                  $
                  4,825
                  
                  
                  $
                  54,059
                  
                  
                  $
                  6,064





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





March 31, 2010
                  
                  
                  December 31, 2009(Dollars in thousands)
                  
                  Loan
                  
                  
                  Impairment
                  
                  
                  Loan
                  
                  
                  ImpairmentBalance
                  
                  
                  Allowance
                  
                  
                  Balance
                  
                  
                  AllowanceNon-accrual
      loans
                  
                  $
                  8,453
                  
                  
                  $
                  101
                  
                  
                  $
                  5,001
                  
                  
                  $
                  -Accruing
      loans with an allowance
                  
                  
                  4,842
                  
                  
                  
                  1,387
                  
                  
                  
                  19,962
                  
                  
                  
                  3,621Accruing
      loans without an allowance
                  
                  
                  31,071
                  
                  
                  
                  -
                  
                  
                  
                  23,149
                  
                  
                  
                  -Total
                  
                  $
                  44,366
                  
                  
                  $
                  1,488
                  
                  
                  $
                  48,112
                  
                  
                  $
                  3,621





Included
in the accruing loans that had impairments at the end of 2009, one in the
Oxford, Mississippi market had an outstanding balance of $9.761 million with an
impairment allowance of $1.405 million. Another significant loan with an
impairment allowance at the end of 2009 was a loan in the Niceville, Florida
market with an outstanding balance of $4.060 million and an impairment allowance
of $870 thousand. Both loans were subsequently written down during the first
quarter of 2010 by a total amount of $2.765 million and did not require an
impairment allowance as of March 31, 2010.


52





FIRST M
& F CORPORATION





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





Past Due
                  
                  
                  Past Due30 – 89
                  
                  
                  90 DaysDays
                  
                  
                  Or More
                  
                  
                  
                  
                  
                  Year-To-(Dollars in thousands)
                  
                  Outstanding
                  
                  
                  And Still
                  
                  
                  And Still
                  
                  
                  
                  
                  
                  Date NetBalances
                  
                  
                  Accruing
                  
                  
                  Accruing
                  
                  
                  Nonaccrual
                  
                  
                  Charge-OffsConstruction
      and development loans:03/31/10
                  
                  $
                  108,574
                  
                  
                  $
                  2,434
                  
                  
                  $
                  352
                  
                  
                  $
                  20,363
                  
                  
                  $
                  85212/31/09
                  
                  
                  123,254
                  
                  
                  
                  3,119
                  
                  
                  
                  901
                  
                  
                  
                  25,655
                  
                  
                  
                  38,71309/30/09
                  
                  
                  187,559
                  
                  
                  
                  6,124
                  
                  
                  
                  4,750
                  
                  
                  
                  44,447
                  
                  
                  
                  20,39506/30/09
                  
                  
                  208,956
                  
                  
                  
                  18,060
                  
                  
                  
                  1,750
                  
                  
                  
                  44,393
                  
                  
                  
                  18,378Loans
      secured by 1-4 family properties:03/31/10
                  
                  $
                  238,904
                  
                  
                  $
                  2,984
                  
                  
                  $
                  440
                  
                  
                  $
                  4,545
                  
                  
                  $
                  28812/31/09
                  
                  
                  239,921
                  
                  
                  
                  4,512
                  
                  
                  
                  312
                  
                  
                  
                  4,490
                  
                  
                  
                  3,36209/30/09
                  
                  
                  244,265
                  
                  
                  
                  3,930
                  
                  
                  
                  263
                  
                  
                  
                  5,555
                  
                  
                  
                  2,40806/30/09
                  
                  
                  249,895
                  
                  
                  
                  4,106
                  
                  
                  
                  72
                  
                  
                  
                  6,227
                  
                  
                  
                  1,684Commercial
      real estate-secured loans:03/31/10
                  
                  $
                  437,642
                  
                  
                  $
                  7,516
                  
                  
                  $
                  46
                  
                  
                  $
                  8,453
                  
                  
                  $
                  3,13212/31/09
                  
                  
                  440,560
                  
                  
                  
                  12,555
                  
                  
                  
                  1,208
                  
                  
                  
                  5,001
                  
                  
                  
                  2,61109/30/09
                  
                  
                  410,093
                  
                  
                  
                  10,110
                  
                  
                  
                  317
                  
                  
                  
                  8,976
                  
                  
                  
                  22006/30/09
                  
                  
                  390,813
                  
                  
                  
                  11,068
                  
                  
                  
                  379
                  
                  
                  
                  18,409
                  
                  
                  
                  190





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





(Dollars in thousands)
                  
                  March 31
                  
                  
                  December 31
                  
                  
                  March 312010
                  
                  
                  2009
                  
                  
                  2009Nonaccrual
      loans
                  
                  $
                  42,148
                  
                  
                  $
                  44,549
                  
                  
                  $
                  52,084Other
      real estate
                  
                  
                  31,460
                  
                  
                  
                  23,578
                  
                  
                  
                  10,907Investment
      securities
                  
                  
                  795
                  
                  
                  
                  825
                  
                  
                  
                  -Total
      non-performing assets
                  
                  $
                  74,403
                  
                  
                  $
                  68,952
                  
                  
                  $
                  62,991Past
      due 90 days or more and stillaccruing
      interest
                  
                  $
                  2,092
                  
                  
                  $
                  2,479
                  
                  
                  $
                  1,409Restructured
      loans (accruing)
                  
                  
                  6,759
                  
                  
                  
                  4,620
                  
                  
                  
                  3,664Ratios:Nonaccrual
      loans to loans
                  
                  
                  4.01
                  %
                  
                  
                  4.17
                  %
                  
                  
                  4.51
                  %Past
      due 90 day loans to loans
                  
                  
                  .20
                  %
                  
                  
                  .23
                  %
                  
                  
                  .12
                  %Non-performing
      credit assets to loans and other real estate
                  
                  
                  6.80
                  %
                  
                  
                  6.24
                  %
                  
                  
                  5.40
                  %Non-performing
      assets to assets
                  
                  
                  4.58
                  %
                  
                  
                  4.15
                  %
                  
                  
                  3.84
                  %





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





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





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


53





FIRST M
& F CORPORATION





Off-Balance
Sheet Arrangements





The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At March 31, 2010, the Company had
$134.905 million in unused loan commitments outstanding. Of these commitments,
$97.052 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, 2010, the Company had $6.525 million in financial standby
letters of credit issued and outstanding.





At March
31, 2010 and December 31, 2009, there were $100 thousand in standby letters of
credit issued on the Company’s behalf by a Federal Home Loan Bank (FHLB). The
Company typically uses these letters of credit as additional collateral on
public funds deposits and is obligated to the Federal Home Loan Bank if the
letters of credit must be drawn upon.





Liabilities
of $28 thousand at March 31, 2010 and $12 thousand at March 31, 2009 are
recognized in Other Liabilities related to the obligation to stand ready to
perform related to standby letters of credit.





The
Company makes commitments to originate mortgage loans that will be held for
sale. The total commitments to originate mortgages to be held for sale were
$7.945 million at March 31, 2010. These commitments are accounted for as
derivatives and are marked to fair value with changes in fair value recorded in
mortgage banking income. At March 31, 2010, mortgage origination-related
derivatives with positive fair values of $10 thousand were included in other
assets and derivatives with negative fair values of $11 thousand were included
in other liabilities.





The
Company also engages in forward sales contracts with mortgage investors to
purchase mortgages held for sale. Those forward sale agreements that have a
determined price and expiration date are accounted for as derivatives and marked
to fair value through mortgage banking income. At March 31, 2010, the Company
had $6.166 million in locked forward sales agreements in place. At March 31,
2010, forward sale-related derivatives with positive fair values of $69 thousand
were included in other assets and no derivatives with negative fair values were
included in other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. The
Company may also be required to repurchase mortgages that do not conform to FNMA
or FHA underwriting standards or that contain critical documentation errors or
fraud. The Company has not sustained any recourse-related losses in its mortgage
program and the repurchase of mortgages has been an extremely rare event.
Mortgages sold that had not reached the first payment date were $8.173 million
at March 31, 2010. No recourse liability was recorded for these
mortgages.





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


54





FIRST M
& F CORPORATION





Critical
Accounting Policies





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





(1)
            Allowance
      for loan losses


(2)
            Fair
      value


(3)
            Goodwill,
      intangible assets and related
impairment


(4)
            Contingent
      liabilities


(5)
            Income
      taxes





Allowance for loan
losses





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





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





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


55





FIRST M
& F CORPORATION





Fair
Value





Certain
of the Company’s assets and liabilities are financial instruments carried at
fair value. This includes securities available for sale and mortgage-related
derivatives. Most of the assets and liabilities carried at fair value are based
on either quoted market prices, market prices for similar instruments or market
data for the instruments being valued. At March 31, 2010, less than 1% of assets
measured at fair value were based on significant unobservable
inputs.





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





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





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





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





Goodwill, intangible assets
and related impairment





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





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





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





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


56





FIRST M
& F CORPORATION





Contingent
liabilities





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





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





Income
Taxes





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





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





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


57





FIRST M
& F CORPORATION





Recent
Accounting Pronouncements





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





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





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





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


58





FIRST M
& F CORPORATION





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





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


59




FIRST M
& F CORPORATION





Item
3 - Quantitative and Qualitative Disclosures About Market Risk





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





Interest
rate shock analysis shows that the Company will experience a 0.37% 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 .18% decrease in
net interest income.





An
analysis of the change in market value of equity shows how an interest rate
shock will affect the difference between the market value of assets and the
market value of liabilities. With all financial instruments being stated at
market value, the market value of equity will remain relatively unchanged with
an immediate and sustained increase in interest rates of 200 basis points. The
market value of equity will decrease by 6.17% with an immediate and sustained
decrease in interest rates of 100 basis points.





The
Company had no hedging instruments in place at March 31, 2010.





Item
4T - 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, 2010, (the "Evaluation Date"), the Company's Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures as defined in the Exchange Act
Rules.  Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are sufficiently effective to ensure that material
information relating to the Company and required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. During the last quarter ended March 31, 2010 there
has been no change in the Company’s internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.





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


60





FIRST M
& F CORPORATION





PART
II: OTHER INFORMATION





Item
1 - Legal Proceedings





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





Item
1A – Risk Factors





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





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





None.





Item
3 – Defaults Upon Senior Securities





None.





Item
4 – (Removed and Reserved)





Item
5 – Other Information





None.


61





FIRST M
& F CORPORATION





Item
6 – Exhibits





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




62





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 14, 2010





BY:
                      /s/ Hugh S. Potts, Jr.
                      
                      
                      BY:
                      /s/ John G. CopelandHugh
      S. Potts, Jr.
                      
                      
                      
                      John
      G. CopelandChairman
      of the Board and
                      
                      
                      
                      Executive
      Vice President andChief
      Executive Officer
                      
                      
                      
                      Chief
      Financial Officer(principal
      executive officer)
                      
                      
                      
                      (principal
      financial officer)





BY:
                  /s/ Robert C. Thompson, IIIRobert
      C. Thompson, IIIVice
      President – Accounting Policy(principal
      accounting officer)




63





FIRST M
& F CORPORATION





EXHIBIT
INDEX





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




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