UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 FORM
10-Q
 
 x
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2009Or ̈
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from __________ to
  __________
 
 Commission
      File Number 000-09424FIRST 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 codeNo Change(Former
      name, former address and former fiscal year,if
      changed since the last
report)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.                           x
Yes    ̈ No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). ;                              ̈
Yes    ̈ No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
Company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
  Large
      accelerated filer  ̈
                                              Accelerated
      filer  xNon-accelerated
      filer    ̈  (Do not check if a smaller
      reporting company)
                                              Smaller
      reporting company  ̈Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act). ̈
      Yes   x
  NoIndicate
      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 July 31,
2009





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
                                31Item
      3
                                
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                57Item
      4
                                
                                Controls
      and Procedures
                                57PART
      II:
                                
                                OTHER
      INFORMATIONItem
      1
                                
                                Legal
      Proceedings
                                58Item
      1A
                                
                                Risk
      Factors
                                58Item
      2
                                
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                58Item
      3
                                
                                Defaults
      upon Senior Securities
                                58Item
      4
                                
                                Submission
      of Matters to a Vote of Security Holders
                                58Item
      5
                                
                                Other
      Information
                                58Item
      6
                                
                                Exhibits
                                59SIGNATURES
                                60EXHIBIT
      INDEXCERTIFICATIONS




2


FIRST M
& F CORPORATION AND SUBSIDIARY





PART
I: FINANCIAL INFORMATION


Item
1 – Financial Statements (Unaudited)


Consolidated
Statements of Condition


(Dollars
      in thousands)June
      30
                                        
                                        
                                        December
      312009
                                        
                                        
                                        2008
                                        
                                        
                                        2008(Unaudited)
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        (Note
      1)AssetsCash
      and due from banks
                                        
                                        $
                                        42,128
                                        
                                        
                                        $
                                        52,983
                                        
                                        
                                        $
                                        47,738Interest
      bearing bank balances
                                        
                                        
                                        6,108
                                        
                                        
                                        
                                        1,378
                                        
                                        
                                        
                                        6,556Federal
      funds sold
                                        
                                        
                                        16,700
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        9,350Securities
      available for sale, amortized costof
      $326,902, $238,072 and $223,882
                                        
                                        
                                        330,925
                                        
                                        
                                        
                                        236,936
                                        
                                        
                                        
                                        227,145Loans
      held for sale
                                        
                                        
                                        4,897
                                        
                                        
                                        
                                        6,327
                                        
                                        
                                        
                                        7,698Loans,
      net of unearned income
                                        
                                        
                                        1,107,741
                                        
                                        
                                        
                                        1,195,202
                                        
                                        
                                        
                                        1,176,595Allowance
      for loan losses
                                        
                                        
                                        (31,323
                                        )
                                        
                                        
                                        (18,901
                                        )
                                        
                                        
                                        (24,918
                                        )Net
      loans
                                        
                                        
                                        1,076,418
                                        
                                        
                                        
                                        1,176,301
                                        
                                        
                                        
                                        1,151,677Bank
      premises and equipment
                                        
                                        
                                        44,215
                                        
                                        
                                        
                                        45,022
                                        
                                        
                                        
                                        44,642Accrued
      interest receivable
                                        
                                        
                                        8,639
                                        
                                        
                                        
                                        11,031
                                        
                                        
                                        
                                        9,832Other
      real estate
                                        
                                        
                                        22,575
                                        
                                        
                                        
                                        6,545
                                        
                                        
                                        
                                        11,061Goodwill
                                        
                                        
                                        16,772
                                        
                                        
                                        
                                        32,572
                                        
                                        
                                        
                                        32,572Other
      intangible assets
                                        
                                        
                                        5,653
                                        
                                        
                                        
                                        7,370
                                        
                                        
                                        
                                        7,127Bank
      owned life insurance
                                        
                                        
                                        20,722
                                        
                                        
                                        
                                        20,207
                                        
                                        
                                        
                                        20,522Other
      assets
                                        
                                        
                                        29,571
                                        
                                        
                                        
                                        20,683
                                        
                                        
                                        
                                        20,945$
                                        1,625,323
                                        
                                        
                                        $
                                        1,617,355
                                        
                                        
                                        $
                                        1,596,865Liabilities and Stockholders’
      EquityLiabilities:Noninterest-bearing
      deposits
                                        
                                        $
                                        181,163
                                        
                                        
                                        $
                                        187,145
                                        
                                        
                                        $
                                        178,689Interest-bearing
      deposits
                                        
                                        
                                        1,128,384
                                        
                                        
                                        
                                        1,081,232
                                        
                                        
                                        
                                        1,082,698Total
      deposits
                                        
                                        
                                        1,309,547
                                        
                                        
                                        
                                        1,268,377
                                        
                                        
                                        
                                        1,261,387Federal
      funds purchased and repurchase agreements
                                        
                                        
                                        6,780
                                        
                                        
                                        
                                        17,945
                                        
                                        
                                        
                                        9,728Other
      borrowings
                                        
                                        
                                        135,975
                                        
                                        
                                        
                                        152,367
                                        
                                        
                                        
                                        151,547Junior
      subordinated debt
                                        
                                        
                                        30,928
                                        
                                        
                                        
                                        30,928
                                        
                                        
                                        
                                        30,928Accrued
      interest payable
                                        
                                        
                                        3,007
                                        
                                        
                                        
                                        3,523
                                        
                                        
                                        
                                        3,537Other
      liabilities
                                        
                                        
                                        6,429
                                        
                                        
                                        
                                        4,824
                                        
                                        
                                        
                                        3,770Total
      liabilities
                                        
                                        
                                        1,492,666
                                        
                                        
                                        
                                        1,477,964
                                        
                                        
                                        
                                        1,460,897Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Class
      B; 1,000,000 shares authorized; 30,000 shares issued
                                        
                                        
                                        28,717
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      stock of $5.00 par value; 15,000,000 sharesauthorized:
      9,069,346, 9,060,080 and9,063,346
      shares issued
                                        
                                        
                                        45,347
                                        
                                        
                                        
                                        45,300
                                        
                                        
                                        
                                        45,317Additional
      paid-in capital
                                        
                                        
                                        31,918
                                        
                                        
                                        
                                        30,395
                                        
                                        
                                        
                                        30,447Nonvested
      restricted stock awards
                                        
                                        
                                        747
                                        
                                        
                                        
                                        743
                                        
                                        
                                        
                                        780Retained
      earnings
                                        
                                        
                                        25,906
                                        
                                        
                                        
                                        64,683
                                        
                                        
                                        
                                        60,133Accumulated
      other comprehensive income (loss)
                                        
                                        
                                        21
                                        
                                        
                                        
                                        (1,748
                                        )
                                        
                                        
                                        (727
                                        )First
      M&F Corporation equity
                                        
                                        
                                        132,656
                                        
                                        
                                        
                                        139,373
                                        
                                        
                                        
                                        135,950Noncontrolling
      interest in subsidiaries
                                        
                                        
                                        1
                                        
                                        
                                        
                                        18
                                        
                                        
                                        
                                        18Total
      equity
                                        
                                        
                                        132,657
                                        
                                        
                                        
                                        139,391
                                        
                                        
                                        
                                        135,968$
                                        1,625,323
                                        
                                        
                                        $
                                        1,617,355
                                        
                                        
                                        $
                                        1,596,865





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




3





FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Operations


(Unaudited)





(Dollars
      in thousands, except per share data)
                      
                      Three Months Ended
                      
                      
                      Six Months EndedJune 30
                      
                      
                      June 302009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Interest
      income:Interest
      and fees on loans
                      
                      $
                      16,076
                      
                      
                      $
                      20,330
                      
                      
                      $
                      33,349
                      
                      
                      $
                      42,485Interest
      on loans held for sale
                      
                      
                      37
                      
                      
                      
                      98
                      
                      
                      
                      116
                      
                      
                      
                      195Taxable
      investments
                      
                      
                      2,495
                      
                      
                      
                      2,357
                      
                      
                      
                      4,811
                      
                      
                      
                      4,714Tax-exempt
      investments
                      
                      
                      536
                      
                      
                      
                      546
                      
                      
                      
                      1,098
                      
                      
                      
                      1,053Federal
      funds sold
                      
                      
                      14
                      
                      
                      
                      46
                      
                      
                      
                      39
                      
                      
                      
                      134Interest
      bearing bank balances
                      
                      
                      2
                      
                      
                      
                      28
                      
                      
                      
                      8
                      
                      
                      
                      105Total
      interest income
                      
                      
                      19,160
                      
                      
                      
                      23,405
                      
                      
                      
                      39,421
                      
                      
                      
                      48,686Interest
      expense:Deposits
                      
                      
                      6,106
                      
                      
                      
                      8,149
                      
                      
                      
                      12,491
                      
                      
                      
                      17,870Federal
      funds purchased and repurchase agreements
                      
                      
                      24
                      
                      
                      
                      101
                      
                      
                      
                      57
                      
                      
                      
                      161Other
      borrowings
                      
                      
                      1,272
                      
                      
                      
                      1,563
                      
                      
                      
                      2,775
                      
                      
                      
                      3,439Junior
      subordinated debt
                      
                      
                      493
                      
                      
                      
                      492
                      
                      
                      
                      989
                      
                      
                      
                      989Total
      interest expense
                      
                      
                      7,895
                      
                      
                      
                      10,305
                      
                      
                      
                      16,312
                      
                      
                      
                      22,459Net
      interest income
                      
                      
                      11,265
                      
                      
                      
                      13,100
                      
                      
                      
                      23,109
                      
                      
                      
                      26,227Provision
      for loan losses
                      
                      
                      9,195
                      
                      
                      
                      6,080
                      
                      
                      
                      29,035
                      
                      
                      
                      6,860Net
      interest income (expense) afterprovision
      for loan losses
                      
                      
                      2,070
                      
                      
                      
                      7,020
                      
                      
                      
                      (5,926
                      )
                      
                      
                      19,367Noninterest
      income:Service
      charges on deposit accounts
                      
                      
                      2,812
                      
                      
                      
                      2,930
                      
                      
                      
                      5,334
                      
                      
                      
                      5,723Mortgage
      banking income
                      
                      
                      592
                      
                      
                      
                      232
                      
                      
                      
                      960
                      
                      
                      
                      625Agency
      commission income
                      
                      
                      957
                      
                      
                      
                      1,037
                      
                      
                      
                      1,928
                      
                      
                      
                      2,038Trust
      and brokerage income
                      
                      
                      136
                      
                      
                      
                      198
                      
                      
                      
                      252
                      
                      
                      
                      336Bank
      owned life insurance income
                      
                      
                      247
                      
                      
                      
                      197
                      
                      
                      
                      364
                      
                      
                      
                      348Other
      income
                      
                      
                      406
                      
                      
                      
                      665
                      
                      
                      
                      1,500
                      
                      
                      
                      1,690Securities
      gains, net
                      
                      
                      1
                      
                      
                      
                      11
                      
                      
                      
                      1
                      
                      
                      
                      22Total
      investment other-than-temporary impairment losses
                      
                      
                      (393
                      )
                      
                      
                      -
                      
                      
                      
                      (393
                      )
                      
                      
                      -Portion
      of loss recognized in other comprehensive income(before
      taxes)
                      
                      
                      218
                      
                      
                      
                      -
                      
                      
                      
                      218
                      
                      
                      
                      -Net
      investment impairment losses recognized
                      
                      
                      (175
                      )
                      
                      
                      -
                      
                      
                      
                      (175
                      )
                      
                      
                      -Total
      noninterest income
                      
                      
                      4,976
                      
                      
                      
                      5,270
                      
                      
                      
                      10,164
                      
                      
                      
                      10,782Noninterest
      expenses:Salaries
      and employee benefits
                      
                      
                      7,298
                      
                      
                      
                      7,307
                      
                      
                      
                      14,460
                      
                      
                      
                      14,963Net
      occupancy expenses
                      
                      
                      1,066
                      
                      
                      
                      1,026
                      
                      
                      
                      2,174
                      
                      
                      
                      2,031Equipment
      expenses
                      
                      
                      734
                      
                      
                      
                      898
                      
                      
                      
                      1,489
                      
                      
                      
                      1,789Software
      and processing expenses
                      
                      
                      467
                      
                      
                      
                      526
                      
                      
                      
                      993
                      
                      
                      
                      957Telecommunication
      expenses
                      
                      
                      256
                      
                      
                      
                      271
                      
                      
                      
                      515
                      
                      
                      
                      548Marketing
      and business development expenses
                      
                      
                      348
                      
                      
                      
                      370
                      
                      
                      
                      720
                      
                      
                      
                      669Foreclosed
      property expenses
                      
                      
                      1,526
                      
                      
                      
                      527
                      
                      
                      
                      2,282
                      
                      
                      
                      616FDIC
      insurance assessments
                      
                      
                      1,339
                      
                      
                      
                      108
                      
                      
                      
                      1,815
                      
                      
                      
                      143Goodwill
      impairment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,800
                      
                      
                      
                      -Intangible
      asset amortization and impairment
                      
                      
                      105
                      
                      
                      
                      121
                      
                      
                      
                      1,474
                      
                      
                      
                      242Other
      expenses
                      
                      
                      2,676
                      
                      
                      
                      2,306
                      
                      
                      
                      5,134
                      
                      
                      
                      4,856Total
      noninterest expenses
                      
                      
                      15,815
                      
                      
                      
                      13,460
                      
                      
                      
                      46,856
                      
                      
                      
                      26,814Income
      (loss) before income taxes
                      
                      
                      (8,769
                      )
                      
                      
                      (1,170
                      )
                      
                      
                      (42,618
                      )
                      
                      
                      3,335Income
      tax expense (benefit)
                      
                      
                      (3,660
                      )
                      
                      
                      (710
                      )
                      
                      
                      (10,252
                      )
                      
                      
                      653Net
      income (loss)
                      
                      
                      (5,109
                      )
                      
                      
                      (460
                      )
                      
                      
                      (32,366
                      )
                      
                      
                      2,682Net
      income (loss) attributable to noncontrolling interests
                      
                      
                      2
                      
                      
                      
                      6
                      
                      
                      
                      (14
                      )
                      
                      
                      9Net
      income (loss) attributable to First M&F Corporation
                      
                      $
                      (5,111
                      )
                      
                      $
                      (466
                      )
                      
                      $
                      (32,352
                      )
                      
                      $
                      2,673Dividends
      and accretion on preferred stock
                      
                      
                      439
                      
                      
                      
                      -
                      
                      
                      
                      593
                      
                      
                      
                      -Net
      income (loss) applicable to common stock
                      
                      $
                      (5,550
                      )
                      
                      $
                      (466
                      )
                      
                      $
                      (32,945
                      )
                      
                      $
                      2,673Net
      income (loss) allocated to common shareholders
                      
                      $
                      (5,498
                      )
                      
                      $
                      (458
                      )
                      
                      $
                      (32,587
                      )
                      
                      $
                      2,639Earnings
      (loss) per share:Basic
                      
                      $
                      (.61
                      )
                      
                      $
                      (.05
                      )
                      
                      $
                      (3.60
                      )
                      
                      $
                      .29Diluted
                      
                      $
                      (.61
                      )
                      
                      $
                      (.05
                      )
                      
                      $
                      (3.60
                      )
                      
                      $
                      .29





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




4




FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income


(Unaudited)





(Dollars
      in thousands)
                                                      
                                                      Three Months Ended
                                                      
                                                      
                                                      Six Months EndedJune 30
                                                      
                                                      
                                                      June 302009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Net
      income (loss)
                                                      
                                                      $
                                                      (5,109
                                                      )
                                                      
                                                      $
                                                      (460
                                                      )
                                                      
                                                      $
                                                      (32,366
                                                      )
                                                      
                                                      $
                                                      2,682Other
      comprehensive income:Change
      in unrealized gains (losses) on securitiesavailable
      for sale, net of tax of $456 and $1,456 for thethree
      months ended June 30 and $217 and $626 forthe
      six months ended June 30
                                                      
                                                      
                                                      (761
                                                      )
                                                      
                                                      
                                                      (2,446
                                                      )
                                                      
                                                      
                                                      369
                                                      
                                                      
                                                      
                                                      (1,051
                                                      )Reclassification
      adjustment for impairment losses onsecurities
      available for sale included in net income, net oftax
      of $65 and $0 for the three months ended June 30 and$65
      and $0 for the six months ended June 30
                                                      
                                                      
                                                      110
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      110
                                                      
                                                      
                                                      
                                                      -Reclassification
      adjustment for (gains) losses on securitiesavailable
      for sale included in net income, net oftax
      of $0 and $4 for the three months ended June 30 and$0
      and $8 for the six months ended June 30
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      (7
                                                      )
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      (14
                                                      )Defined
      benefit pension plan:Transition
      obligation amortization, net of tax of $1and
      $1 for the three months ended June 30 and $2 and $2for
      the six months ended June 30
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      (2
                                                      )
                                                      
                                                      
                                                      (2
                                                      )
                                                      
                                                      
                                                      (3
                                                      )Prior
      service cost amortization, net of tax of $3 and $3for
      the three months ended June 30 and $6 and $6 for thesix
      months ended June 30
                                                      
                                                      
                                                      (6
                                                      )
                                                      
                                                      
                                                      (6
                                                      )
                                                      
                                                      
                                                      (12
                                                      )
                                                      
                                                      
                                                      (12
                                                      )Actuarial
      loss amortization, net of tax of $85 and $30 forthe
      three months ended June 30 and $169 and $60 for thesix
      months ended June 30
                                                      
                                                      
                                                      142
                                                      
                                                      
                                                      
                                                      52
                                                      
                                                      
                                                      
                                                      284
                                                      
                                                      
                                                      
                                                      103Other
      comprehensive income (loss)
                                                      
                                                      
                                                      (517
                                                      )
                                                      
                                                      
                                                      (2,409
                                                      )
                                                      
                                                      
                                                      748
                                                      
                                                      
                                                      
                                                      (977
                                                      )Total
      comprehensive income (loss)
                                                      
                                                      
                                                      (5,626
                                                      )
                                                      
                                                      
                                                      (2,869
                                                      )
                                                      
                                                      
                                                      (31,618
                                                      )
                                                      
                                                      
                                                      1,705Comprehensive
      income (loss) attributable tononcontrolling
      interests
                                                      
                                                      
                                                      2
                                                      
                                                      
                                                      
                                                      6
                                                      
                                                      
                                                      
                                                      (14
                                                      )
                                                      
                                                      
                                                      9Comprehensive
      income (loss) of First M&F Corp
                                                      
                                                      $
                                                      (5,628
                                                      )
                                                      
                                                      $
                                                      (2,875
                                                      )
                                                      
                                                      $
                                                      (31,604
                                                      )
                                                      
                                                      $
                                                      1,696





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




5




FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Stockholders' Equity


Six
Months Ended June 30, 2009 and 2008


(Unaudited)





(Dollars in
      thousands, except per share data)
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        Nonvested
                                        
                                        
                                        
                                        
                                        
                                        AccumulatedAdditional
                                        
                                        
                                        Restricted
                                        
                                        
                                        
                                        
                                        
                                        OtherPreferred
                                        
                                        
                                        Common
                                        
                                        
                                        Paid-in
                                        
                                        
                                        Stock
                                        
                                        
                                        Retained
                                        
                                        
                                        Comprehensive
                                        
                                        
                                        NoncontrollingStock
                                        
                                        
                                        Stock
                                        
                                        
                                        Capital
                                        
                                        
                                        Awards
                                        
                                        
                                        Earnings
                                        
                                        
                                        Income
      (Loss)
                                        
                                        
                                        Interest
                                        
                                        
                                        TotalJanuary
      1, 2008
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        45,338
                                        
                                        
                                        $
                                        30,475
                                        
                                        
                                        $
                                        643
                                        
                                        
                                        $
                                        64,395
                                        
                                        
                                        $
                                        (771
                                        )
                                        
                                        $
                                        18
                                        
                                        
                                        $
                                        140,098Net
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,673
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        2,682Cash
      dividends ($.26 per share)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,387
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,387
                                        )7,500
      common shares repurchased
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (38
                                        )
                                        
                                        
                                        (80
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (118
                                        )Share-based
      compensationexpense
      recognized
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        100
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        102Net
      change
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (977
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (977
                                        )Distributions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (9
                                        )
                                        
                                        
                                        (9
                                        )June
      30, 2008
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        45,300
                                        
                                        
                                        $
                                        30,395
                                        
                                        
                                        $
                                        743
                                        
                                        
                                        $
                                        64,683
                                        
                                        
                                        $
                                        (1,748
                                        )
                                        
                                        $
                                        18
                                        
                                        
                                        $
                                        139,391January
      1, 2009
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        45,317
                                        
                                        
                                        $
                                        30,447
                                        
                                        
                                        $
                                        780
                                        
                                        
                                        $
                                        60,133
                                        
                                        
                                        $
                                        (727
                                        )
                                        
                                        $
                                        18
                                        
                                        
                                        $
                                        135,968Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (32,352
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (14
                                        )
                                        
                                        
                                        (32,366
                                        )Cash
      dividends ($.14 per share)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,283
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,283
                                        )Issuance
      of 30,000 shares ofpreferred
      stock
                                        
                                        
                                        28,637
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28,637Issuance
      of stock warrant for513,113
      shares
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,363
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,363Dividends
      and accretion onpreferred
      stock
                                        
                                        
                                        80
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (593
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (513
                                        )6,000
      restricted share awards vested
                                        
                                        
                                        -
                                        
                                        
                                        
                                        30
                                        
                                        
                                        
                                        71
                                        
                                        
                                        
                                        (101
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Share-based
      compensationexpense
      recognized
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        10
                                        
                                        
                                        
                                        68
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        79Tax
      benefits on restricted stockdividends
      paid
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        27Net
      change
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        748
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        748Distributions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (3
                                        )
                                        
                                        
                                        (3
                                        )June
      30, 2009
                                        
                                        $
                                        28,717
                                        
                                        
                                        $
                                        45,347
                                        
                                        
                                        $
                                        31,918
                                        
                                        
                                        $
                                        747
                                        
                                        
                                        $
                                        25,906
                                        
                                        
                                        $
                                        21
                                        
                                        
                                        $
                                        1
                                        
                                        
                                        $
                                        132,657





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)
                                      
                                      Six
      Months Ended June 302009
                                      
                                      
                                      2008Cash
      flows from operating activities:Net
      income (loss)
                                      
                                      $
                                      (32,366
                                      )
                                      
                                      $
                                      2,682Adjustments
      to reconcile net income (loss)to
      net cash provided by operating activities:Share-based
      compensation
                                      
                                      
                                      79
                                      
                                      
                                      
                                      102Amortization
      of pension costs
                                      
                                      
                                      439
                                      
                                      
                                      
                                      60Depreciation
      and amortization
                                      
                                      
                                      1,574
                                      
                                      
                                      
                                      1,702Goodwill
      impairment
                                      
                                      
                                      15,800
                                      
                                      
                                      
                                      -Intangible
      asset impairments
                                      
                                      
                                      1,248
                                      
                                      
                                      
                                      -Provision
      for loan losses
                                      
                                      
                                      29,035
                                      
                                      
                                      
                                      6,860Net
      investment amortization (accretion)
                                      
                                      
                                      358
                                      
                                      
                                      
                                      (103
                                      )Net
      change in unearned fees/deferred costs on loans
                                      
                                      
                                      (36
                                      )
                                      
                                      
                                      (140
                                      )Capitalized
      dividends on FHLB stock
                                      
                                      
                                      (13
                                      )
                                      
                                      
                                      (167
                                      )Net
      accretion of discount on time deposits
                                      
                                      
                                      2
                                      
                                      
                                      
                                      27Gain
      on securities available for sale
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (22
                                      )Impairment
      loss on investment
                                      
                                      
                                      175
                                      
                                      
                                      
                                      -Gain
      on loans held for sale
                                      
                                      
                                      (596
                                      )
                                      
                                      
                                      (471
                                      )Other
      asset sales losses
                                      
                                      
                                      1,826
                                      
                                      
                                      
                                      441Deferred
      income taxes
                                      
                                      
                                      (4,169
                                      )
                                      
                                      
                                      (2,019
                                      )Originations
      of loans held for sale, net of repayments
                                      
                                      
                                      (59,112
                                      )
                                      
                                      
                                      (37,578
                                      )Sales
      proceeds of loans held for sale
                                      
                                      
                                      62,424
                                      
                                      
                                      
                                      37,229(Increase)
      decrease in:Accrued
      interest receivable
                                      
                                      
                                      1,193
                                      
                                      
                                      
                                      1,403Cash
      surrender value of bank owned life insurance
                                      
                                      
                                      (364
                                      )
                                      
                                      
                                      (348
                                      )Other
      assets
                                      
                                      
                                      1,165
                                      
                                      
                                      
                                      949Increase
      (decrease) in:Accrued
      interest payable
                                      
                                      
                                      (530
                                      )
                                      
                                      
                                      (1,628
                                      )Other
      liabilities
                                      
                                      
                                      (3,741
                                      )
                                      
                                      
                                      1,455Net
      cash provided by operating activities
                                      
                                      
                                      14,390
                                      
                                      
                                      
                                      10,434Cash
      flows from investing activities:Purchases
      of securities available for sale
                                      
                                      
                                      (138,753
                                      )
                                      
                                      
                                      (66,013
                                      )Sales
      of securities available for sale
                                      
                                      
                                      1,835
                                      
                                      
                                      
                                      3,578Maturities
      of securities available for sale
                                      
                                      
                                      33,366
                                      
                                      
                                      
                                      61,063Net
      (increase) decrease in:Interest
      bearing bank balances
                                      
                                      
                                      448
                                      
                                      
                                      
                                      2,102Federal
      funds sold
                                      
                                      
                                      (7,350
                                      )
                                      
                                      
                                      2,000Loans
                                      
                                      
                                      27,793
                                      
                                      
                                      
                                      17,751Bank
      premises and equipment
                                      
                                      
                                      (869
                                      )
                                      
                                      
                                      (918
                                      )Net
      benefits received (purchases) of bank owned life insurance
                                      
                                      
                                      164
                                      
                                      
                                      
                                      (30
                                      )Proceeds
      from sales of other real estate and other repossessed
    assets
                                      
                                      
                                      5,087
                                      
                                      
                                      
                                      3,693Net
      redemptions of FHLB stock
                                      
                                      
                                      225
                                      
                                      
                                      
                                      2,378Net
      cash provided by (used in) investing activities
                                      
                                      
                                      (78,054
                                      )
                                      
                                      
                                      25,604




(Continued)




7




FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





(Dollars
      in thousands)
                          
                          Six
      Months Ended June 302009
                          
                          
                          2008Cash
      flows from financing activities:Net
      increase in deposits
                          
                          $
                          48,158
                          
                          
                          $
                          5,895Net
      decrease in short-term borrowings
                          
                          
                          (2,948
                          )
                          
                          
                          8,269Proceeds
      from other borrowings
                          
                          
                          20,000
                          
                          
                          
                          115,500Repayments
      of other borrowings
                          
                          
                          (35,572
                          )
                          
                          
                          (164,445
                          )Earnings
      distributions to noncontrolling interests
                          
                          
                          (3
                          )
                          
                          
                          (9
                          )Common
      dividends paid
                          
                          
                          (1,283
                          )
                          
                          
                          (2,387
                          )Preferred
      dividends paid
                          
                          
                          (325
                          )
                          
                          
                          -Preferred
      shares and common stock warrant issued to U. S. Treasury
                          
                          
                          30,000
                          
                          
                          
                          -Common
      shares repurchased
                          
                          
                          -
                          
                          
                          
                          (118
                          )Tax
      benefits related to share-based compensation
                          
                          
                          27
                          
                          
                          
                          -Net
      cash provided by (used in) financing activities
                          
                          
                          58,054
                          
                          
                          
                          (37,295
                          )Net
      decrease in cash and due from banks
                          
                          
                          (5,610
                          )
                          
                          
                          (1,257
                          )Cash
      and due from banks at January 1
                          
                          
                          47,738
                          
                          
                          
                          54,240Cash
      and due from banks at June 30
                          
                          $
                          42,128
                          
                          
                          $
                          52,983Total
      interest paid
                          
                          $
                          16,836
                          
                          
                          $
                          24,062Total
      income taxes paid
                          
                          
                          97
                          
                          
                          
                          1,941Income
      tax refunds received
                          
                          
                          27
                          
                          
                          
                          -Transfers
      of loans to foreclosed property
                          
                          
                          18,419
                          
                          
                          
                          4,354U.
      S. Treasury preferred dividend accrued but unpaid
                          
                          
                          188
                          
                          
                          
                          -Accretion
      on U. S. Treasury preferred stock
                          
                          
                          80
                          
                          
                          
                          -




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




8





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 1:  Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The condensed balance sheet as of December 31, 2008, has been
derived from audited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The condensed consolidated financial
statements 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 51% ownership in Merchants
Financial Services, LLC, an accounts receivable financing business, and the
Bank’s 55% ownership in MS Statewide Title, LLC, a title insurance agency.
Certain reclassifications have been made to the 2008 financial statements to be
consistent with the 2009 presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2008.
Operating results for the interim periods disclosed herein are not necessarily
indicative of the results that may be expected for a full year or any future
period.





Note 2:  Fair
Value





Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” for financial
assets and liabilities. SFAS No. 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. A fair value measurement assumes that
the transaction to sell the asset or transfer the liability occurs in the
principal market for the asset or liability or, in the absence of a principal
market, the most advantageous market for the asset or liability. Valuation
techniques use certain inputs to arrive at fair value. Inputs to valuation
techniques are the assumptions that market participants would use in pricing the
asset or liability. They may be observable or unobservable. SFAS No. 157
establishes a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. As required by SFAS No. 157,
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.





The
application of SFAS No. 157 in situations where the market for a financial asset
is not active was clarified by the issuance of FSP No. FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active,” in October 2008. FSP No. FAS 157-3 was effective for financial
statements issued as of September 30, 2008 and thereafter. FSP No. FAS 157-3 did
not have a material impact on the methods by which the Company determines the
fair values of its financial assets. FSP No. FAS 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,” was
issued in April 2009 and became effective for the second quarter of 2009. This
FSP clarifies factors that determine whether transactions are orderly or not in
evaluating the reliability of market transactions for fair value estimates. FSP
No. FAS 157-2 deferred the application of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities that are measured at fair value on a nonrecurring
basis to fiscal years beginning after November 15, 2008. The Company adopted the
provisions of SFAS No. 157 with respect to nonfinancial assets and nonfinancial
liabilities beginning on January 1, 2009.




9





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
following table summarizes assets and liabilities measured at fair value on a
recurring basis as of June 30, 2009, December 31, 2008 and June 30, 2008,
segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value:





Fair
      Value Measurements atJune
      30, 2009, UsingQuotedPrices
      InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured
      at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars
      in thousands)
                
                June
      30, 2009
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)U.S.
      Treasury securities
                
                $
                529
                
                
                $
                -
                
                
                $
                529
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                56,255
                
                
                
                -
                
                
                
                56,255
                
                
                
                -Mortgage-backed
      investments
                
                
                204,917
                
                
                
                -
                
                
                
                204,917
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                62,279
                
                
                
                -
                
                
                
                62,279
                
                
                
                -Collateralized
      debt obligations
                
                
                3,254
                
                
                
                -
                
                
                
                -
                
                
                
                3,254Other
      debt securities
                
                
                2,706
                
                
                
                -
                
                
                
                2,706
                
                
                
                -Equity
      securities
                
                
                985
                
                
                
                -
                
                
                
                985
                
                
                
                -Total
      securities available for sale
                
                $
                330,925
                
                
                $
                -
                
                
                $
                327,671
                
                
                $
                3,254Mortgage
      derivative assets
                
                
                124
                
                
                
                -
                
                
                
                124
                
                
                
                -Mortgage
      derivative liabilities
                
                
                55
                
                
                
                -
                
                
                
                55
                
                
                
                -





Fair
      Value Measurements atDecember
      31, 2008, UsingQuotedPrices
      InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured
      at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars
      in thousands)
                
                December
      31, 2008
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)U.S.
      Treasury securities
                
                $
                543
                
                
                $
                -
                
                
                $
                543
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                8,397
                
                
                
                -
                
                
                
                8,397
                
                
                
                -Mortgage-backed
      investments
                
                
                145,362
                
                
                
                -
                
                
                
                145,362
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                64,829
                
                
                
                -
                
                
                
                64,829
                
                
                
                -Collateralized
      debt obligations
                
                
                3,969
                
                
                
                -
                
                
                
                3,969
                
                
                
                -Other
      debt securities
                
                
                3,528
                
                
                
                -
                
                
                
                3,528
                
                
                
                -Equity
      securities
                
                
                517
                
                
                
                -
                
                
                
                517
                
                
                
                -Total
      available for sale securities
                
                $
                227,145
                
                
                $
                -
                
                
                $
                227,145
                
                
                $
                -Mortgage
      derivative assets
                
                
                45
                
                
                
                -
                
                
                
                45
                
                
                
                -Mortgage
      derivative liabilities
                
                
                27
                
                
                
                -
                
                
                
                27
                
                
                
                -




10





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Fair
      Value Measurements atJune
      30, 2008, UsingQuotedPrices
      InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured
      at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars
      in thousands)
                
                June
      30, 2008
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)U.S.
      Treasury securities
                
                $
                532
                
                
                $
                -
                
                
                $
                532
                
                
                $
                -U.S.
      Government sponsored entities
                
                
                27,031
                
                
                
                -
                
                
                
                27,031
                
                
                
                -Mortgage-backed
      investments
                
                
                139,850
                
                
                
                -
                
                
                
                139,850
                
                
                
                -Obligations
      of states and political subdivisions
                
                
                60,947
                
                
                
                -
                
                
                
                60,947
                
                
                
                -Collateralized
      debt obligations
                
                
                4,477
                
                
                
                -
                
                
                
                4,477
                
                
                
                -Other
      debt securities
                
                
                3,677
                
                
                
                -
                
                
                
                3,677
                
                
                
                -Equity
      securities
                
                
                422
                
                
                
                -
                
                
                
                422
                
                
                
                -Total
      securities available for sale
                
                $
                236,936
                
                
                $
                -
                
                
                $
                236,936
                
                
                $
                -Mortgage
      derivative assets
                
                
                43
                
                
                
                -
                
                
                
                43
                
                
                
                -Mortgage
      derivative liabilities
                
                
                11
                
                
                
                -
                
                
                
                11
                
                
                
                -





U.S. Treasury, Government sponsored
entity and mortgage-backed securities. Securities issued by the U.S.
Treasury and Government sponsored enterprises 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 rarely trade and are reported using Level 2
inputs. The fair value measurements consider observable data that may include
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 derived from the 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 $4.848 million with
estimated fair values of $3.254 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 has utilized a discounted cash flow
model based on market yields of trust-preferred securities and adjustments for
liquidity and credit factors to determine the fair values of these beneficial
interests. The Company made significant unobservable adjustments to the credit
factors related to these securities, based on Management’s best estimates of the
default assumptions that market participants may use, which resulted in their
transfer to a Level 3 inputs classification during the second quarter of 2009.
The Company relied on the guidance in the Financial Accounting Standards Board’s
FSP No. EITF 99-20-1 to test the beneficial interests for impairment purposes
using discounted cash flow methodologies. One security did not pass the
impairment test. A discounted cash flow analysis of this security resulted in an
other-than-temporary credit impairment of $175 thousand, which was recorded as a
loss in the statement of operations for the second quarter of 2009.





Equity securities. Equity
securities are comprised of mutual funds that are reported using Level 2 inputs.
These securities are either actively traded or are comparable to similar mutual
funds that are actively traded.





Mortgage
Derivatives.  Mortgage derivative assets and liabilities are
reported at fair value utilizing Level 2 inputs. These assets and liabilities
represent the fair values of the commitments of the Company to originate
mortgages at certain rates as well as the commitments to sell the mortgages to
investors at locked prices within a specified period of time. The Company uses
an internal valuation model with observable market data inputs consisting
primarily of dealer quotes, market yield curves and credit-related adjustments.
Mortgage derivative assets are included in other assets and mortgage derivative
liabilities are included in other liabilities in the Company’s balance
sheet.




11





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
following table reports the activity for 2009 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)Collateralized Debt ObligationsBalance
      at January 1 and April 1, 2009
                      
                      $
                      -Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                      
                      
                      (175
                      )Other-than-temporary
      impairment included in other comprehensive income
                      
                      
                      (218
                      )Other
      gains/losses included in other comprehensive income
                      
                      
                      (319
                      )Purchases,
      issuances, and settlements
                      
                      
                      -Transfers
      in and/or out of Level 3
                      
                      
                      3,966Balance
      at June 30, 2009
                      
                      $
                      3,254The
      amount of total gains or losses for the period includedin
      earnings attributable to the change in unrealized gainsor
      losses relating to assets still held at the reporting date
                      
                      $
                      (175
                      )





The $175
thousand credit-related other-than-temporary loss incurred during the second
quarter of 2009 is stated as a separate line item in the Company’s consolidated
statement of operations.





The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of June 30, 2009, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:





Fair Value Measurements UsingQuotedPrices in
                
                
                
                
                
                
                
                
                
                
                
                Fair ValueActive
                
                
                Significant
                
                
                
                
                
                Charged to
                
                
                AdjustmentFor the
                
                
                Markets for
                
                
                Other
                
                
                Significant
                
                
                Allowance
                
                
                RecognizedQuarter
                
                
                Identical
                
                
                Observable
                
                
                Unobservable
                
                
                for Loan Losses
                
                
                In EarningsEnded
                
                
                Assets
                
                
                Inputs
                
                
                Inputs
                
                
                During
                
                
                During(Dollars in thousands)
                
                06/30/09 (a)
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                Current Period
                
                
                Current PeriodMortgages
      held for sale
                
                $
                2,548
                
                
                $
                -
                
                
                $
                2,548
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (68
                )Impaired
      loans
                
                
                49,449
                
                
                
                -
                
                
                
                49,449
                
                
                
                -
                
                
                
                -
                
                
                
                5,687Loan
      foreclosures
                
                
                14,472
                
                
                
                -
                
                
                
                14,472
                
                
                
                -
                
                
                
                5,755
                
                
                
                -Bankers
      bank stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (78
                )Other
      real estate
                
                
                4,923
                
                
                
                -
                
                
                
                -
                
                
                
                4,923
                
                
                
                -
                
                
                
                (893
                )




12




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Fair Value Measurements UsingQuotedPrices in
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Fair ValueActive
                  
                  
                  Significant
                  
                  
                  
                  
                  
                  Charged to
                  
                  
                  AdjustmentFor the
                  
                  
                  Markets for
                  
                  
                  Other
                  
                  
                  Significant
                  
                  
                  Allowance
                  
                  
                  RecognizedYear-to-Date
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for Loan Losses
                  
                  
                  In EarningsEnded
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars in thousands)
                  
                  06/30/09 (a)
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Current Period
                  
                  
                  Current PeriodMortgages
      held for sale
                  
                  $
                  2,548
                  
                  
                  $
                  -
                  
                  
                  $
                  2,548
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (75
                  )Impaired
      loans
                  
                  
                  49,449
                  
                  
                  
                  -
                  
                  
                  
                  49,449
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,213Loan
      foreclosures
                  
                  
                  14,472
                  
                  
                  
                  -
                  
                  
                  
                  14,472
                  
                  
                  
                  -
                  
                  
                  
                  7,864
                  
                  
                  
                  -Bankers
      bank stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (78
                  )Other
      real estate
                  
                  
                  4,923
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,923
                  
                  
                  
                  -
                  
                  
                  
                  (893
                  )Goodwill
                  
                  
                  16,772
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,772
                  
                  
                  
                  -
                  
                  
                  
                  (15,800
                  )Intangible
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,248
                  )





(a)
            These
      amounts represent the carrying amounts on the consolidated statement of
      condition at the balance sheet date for mortgages held forsale,
      impaired real estate-secured loans, bankers bank stock, other real estate,
      goodwill and intangible assets for which fair valueremeasurements
      took place during the period. Loan foreclosures represent the fair value
      portion of the carrying amounts of other real estateproperties
      that were remeasured 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 remeasurements are recorded in the
consolidated statements of operations in (1) mortgage banking income for
mortgages held for sale, (2) provision for loan losses for impaired loans, (3)
other income for the bankers bank stock, (4) foreclosed property expenses for
other real estate, (5) goodwill impairment for goodwill and (6) intangible asset
amortization and impairment for intangible assets.





Mortgages Held for
Sale.  Loans held for sale, primarily mortgage and student
loans, are reported at the lower of cost or fair value calculated at the
individual loan level. Therefore, although fair values for these instruments are
measured on a recurring basis, the loans may be reported at their amortized cost
if it is lower than the loan’s fair value. Fair value is determined primarily
using a market yield curve and dealer quotes. Changes in the valuation allowance
for mortgages held for sale are recorded in mortgage banking income. At June 30,
2009 there were $2.548 million of mortgages held for sale for which the fair
value was lower than the cost basis. Their cost basis was $2.629 million,
resulting in a valuation allowance of $81 thousand.





Impaired
Loans.  Certain financial assets such as impaired loans are
measured by means that are similar to fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to adjustments similar to fair value adjustments in certain
circumstances, such as when there is evidence of impairment. Impaired values are
determined by discounting expected cash flows by a rate equal to the original
yield on the loan rather than by a market discount rate. However, when market
prices or dealer quotes for loans are available and can be used, then the
impaired value does meet the definition of fair value. Collateral dependent
loans, which are loans for which the repayment is expected to be provided solely
by the underlying collateral, are valued for impairment purposes by using the
fair value of the underlying collateral. Although the valuations based upon
non-market discount rates do not meet the technical definition of “fair value”
they are similar in nature. For collateral dependent loans, collateral values
are estimated using Level 2 inputs based on observable market data. During the
second quarter of 2009, certain real estate-secured impaired loans were
remeasured and reported at fair value through a specific valuation allowance
allocation of the allowance for possible loan losses based upon the fair value
of the underlying collateral. Impaired real estate-secured loans with a carrying
value of $55.136 million were reduced by specific valuation allowance
allocations totaling $5.687 million to a total reported fair value of $49.449
million based on collateral valuations utilizing Level 2 inputs. The amount of
expense recognized was charged to the provision for loan losses to create an
allowance for the loans equal to the impairment amount.





Loan
Foreclosures.  During the second quarter of 2009, certain
foreclosed assets, upon initial recognition, were remeasured and reported at
fair value through a charge-off to the allowance for possible loan losses based
upon the fair value of the foreclosed asset. The fair value of a foreclosed
asset, upon initial recognition, is estimated using Level 2 inputs based on
observable market data. Foreclosed assets measured at fair value upon initial
recognition during the second quarter totaled $14.675 million using Level 2
valuation inputs. During the second quarter $203 thousand of these properties
were disposed of. 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 $5.755 million. The fair value of
the foreclosed assets was recorded in other real estate.




13





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Bankers bank
stock.  Bankers bank stock consists of 100 shares of Silverton
Bank, N.A. which was formerly known as the Georgia Bankers Bank. The stock was
purchased in 2001 for $78 thousand. The Bank was closed by federal bank
regulators on May 1, 2009 and taken into receivership. Since the stock did not
have a readily determinable fair value it was carried at cost in other assets in
the consolidated statement of condition. The Company wrote off the entire $78
thousand balance as an other asset impairment loss which was included in other
income in the consolidated statements of operations.





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. All of the other real estate
properties that were remeasured during the second quarter remained on the
consolidated statement of condition at June 30, 2009.





Goodwill.Goodwill is tested for
impairment on an annual basis and also when there are indicators that an
impairment may have occurred. The Company evaluated its goodwill asset as of
March 31, 2009 after the stock price continued to fall from $8.46 per share at
December 31, 2008 to $6.12 per share at March 31, 2009 and as the Company
continued to accrue for sizeable losses in the real estate construction loan
portfolio. The implied fair value of goodwill was determined after valuing the
community banking unit of the Company using Level 3 inputs based primarily on
(1) historical deal prices for community banks, adjusted for bank size and
credit quality factors and (2) discounted cash flow analyses. The implied fair
value of goodwill was determined as a residual amount after allocating the
estimated value of the net assets of the community banking unit to its
identifiable recognized and unrecognized, both tangible and intangible, assets
and liabilities in a manner similar to the purchase accounting allocations
required by Statement of Financial Accounting Standards No. 141R, “Business
Combinations.” These allocations required the estimation of the fair values of
identifiable assets and liabilities, both recognized and unrecognized, primarily
using Level 3 inputs such as discounted cash flow analyses utilizing cash flow
projections, credit assumptions, and discount rate assumptions and other
adjustments that management assumes that a market participant would use. The
implied fair value of goodwill, which had a carrying value of $32.572 million,
was estimated to be $16.772 million, requiring an impairment charge of $15.800
million.





Intangible
assets.  Intangible assets include a Florida banking charter
and insurance agency customer renewal lists and noncompete agreements. The
Company evaluated these assets for impairment during the first quarter of 2009.
An analysis of expected cash flows related to insurance agency customer renewal
lists and noncompete agreements indicated that the assets were impaired. An
analysis of the Florida banking charter, based on indications of market value
and management’s assessment of economic factors related to the Florida markets,
indicated that it was impaired. The intangible assets were valued using
unobservable (Level 3) inputs. The banking charter is an indefinite lived
intangible asset for which the Company had recorded no amortization expense. The
insurance agency assets were being amortized over their useful lives up until
the time of the impairment test. The Company recorded $14 thousand in
amortization expense related to the insurance agency assets during the first
quarter of 2009. The banking charter was determined to be fully impaired, with
an impairment charge of $1.025 million being recorded in intangible asset
amortization and impairment during the first quarter of 2009. The insurance
agency intangible assets were also deemed to be fully impaired with their
remaining balances of $223 thousand being written off to intangible asset
amortization and impairment expense.




14




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Fair Value of Financial
Instruments





The
following table presents the carrying amounts and fair values of the Company’s
financial instruments at June 30, 2009 and December 31, 2008:





June
      30, 2009
                  
                  
                  December
      31, 2008(Dollars
      in thousands)
                  
                  Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair
      Value
                  
                  
                  Amount
                  
                  
                  Fair
      ValueFinancial
      assets:Cash
      and short-term investments
                  
                  $
                  64,936
                  
                  
                  $
                  64,936
                  
                  
                  $
                  63,644
                  
                  
                  $
                  63,644Securities
      available for sale
                  
                  
                  330,925
                  
                  
                  
                  330,925
                  
                  
                  
                  227,145
                  
                  
                  
                  227,145Loans
      held for sale
                  
                  
                  4,897
                  
                  
                  
                  4,897
                  
                  
                  
                  7,698
                  
                  
                  
                  7,757Loans
      held for investment
                  
                  
                  1,076,418
                  
                  
                  
                  991,757
                  
                  
                  
                  1,151,677
                  
                  
                  
                  1,111,202Agency
      accounts receivable
                  
                  
                  352
                  
                  
                  
                  352
                  
                  
                  
                  276
                  
                  
                  
                  276Accrued
      interest receivable
                  
                  
                  8,639
                  
                  
                  
                  8,639
                  
                  
                  
                  9,832
                  
                  
                  
                  9,832Nonmarketable
      equity investments
                  
                  
                  7,320
                  
                  
                  
                  7,320
                  
                  
                  
                  7,610
                  
                  
                  
                  7,610Investment
      in unconsolidated VIE
                  
                  
                  928
                  
                  
                  
                  928
                  
                  
                  
                  928
                  
                  
                  
                  928Mortgage
      derivative assets
                  
                  
                  124
                  
                  
                  
                  124
                  
                  
                  
                  45
                  
                  
                  
                  45Financial
      liabilities:Noninterest-bearing
      deposits
                  
                  
                  181,163
                  
                  
                  
                  181,163
                  
                  
                  
                  178,689
                  
                  
                  
                  178,689NOW,
      MMDA and savings deposits
                  
                  
                  562,438
                  
                  
                  
                  562,438
                  
                  
                  
                  513,979
                  
                  
                  
                  513,979Certificates
      of deposit
                  
                  
                  565,946
                  
                  
                  
                  575,099
                  
                  
                  
                  568,719
                  
                  
                  
                  579,874Short-term
      borrowings
                  
                  
                  6,780
                  
                  
                  
                  6,780
                  
                  
                  
                  9,728
                  
                  
                  
                  9,728Other
      borrowings
                  
                  
                  135,975
                  
                  
                  
                  137,549
                  
                  
                  
                  151,547
                  
                  
                  
                  153,295Junior
      subordinated debt
                  
                  
                  30,928
                  
                  
                  
                  25,913
                  
                  
                  
                  30,928
                  
                  
                  
                  36,617Agency
      accounts payable
                  
                  
                  1,525
                  
                  
                  
                  1,525
                  
                  
                  
                  574
                  
                  
                  
                  574Accrued
      interest payable
                  
                  
                  3,007
                  
                  
                  
                  3,007
                  
                  
                  
                  3,537
                  
                  
                  
                  3,537Mortgage
      derivative liabilities
                  
                  
                  55
                  
                  
                  
                  55
                  
                  
                  
                  27
                  
                  
                  
                  27Other
      financial instruments:Commitments
      to extend credit and lettersof
      credit
                  
                  
                  (18
                  )
                  
                  
                  (399
                  )
                  
                  
                  (28
                  )
                  
                  
                  (459
                  )





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, dealer quotes and market
yield matrices. Collateralized debt obligations are valued using modeling
techniques.





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 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.




15




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 2:
(Continued)





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.





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.




16





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  Investment Securities and Derivatives





The
following is a summary of the amortized cost and fair value of securities
available for sale at June 30, 2009, December 31, 2008 and June 30,
2008:





Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  Fair(Dollars
      in thousands)
                  
                  Cost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueJune
      30, 2009:U.S.
      Treasury securities
                  
                  $
                  506
                  
                  
                  $
                  23
                  
                  
                  $
                  -
                  
                  
                  $
                  529U.S.
      Government sponsored entities
                  
                  
                  56,110
                  
                  
                  
                  321
                  
                  
                  
                  176
                  
                  
                  
                  56,255Mortgage-backed
      investments
                  
                  
                  200,163
                  
                  
                  
                  4,972
                  
                  
                  
                  218
                  
                  
                  
                  204,917Obligations
      of states and political subdivisions
                  
                  
                  61,598
                  
                  
                  
                  972
                  
                  
                  
                  291
                  
                  
                  
                  62,279Collateralized
      debt obligations
                  
                  
                  4,848
                  
                  
                  
                  -
                  
                  
                  
                  1,594
                  
                  
                  
                  3,254Other
      debt securities
                  
                  
                  2,642
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  2,706Equity
      securities
                  
                  
                  1,035
                  
                  
                  
                  -
                  
                  
                  
                  50
                  
                  
                  
                  985$
                  326,902
                  
                  
                  $
                  6,352
                  
                  
                  $
                  2,329
                  
                  
                  $
                  330,925December
      31, 2008:U.S.
      Treasury securities
                  
                  $
                  509
                  
                  
                  $
                  34
                  
                  
                  $
                  -
                  
                  
                  $
                  543U.S.
      Government sponsored entities
                  
                  
                  8,089
                  
                  
                  
                  308
                  
                  
                  
                  -
                  
                  
                  
                  8,397Mortgage-backed
      investments
                  
                  
                  141,688
                  
                  
                  
                  3,772
                  
                  
                  
                  98
                  
                  
                  
                  145,362Obligations
      of states and political subdivisions
                  
                  
                  64,357
                  
                  
                  
                  841
                  
                  
                  
                  369
                  
                  
                  
                  64,829Collateralized
      debt obligations
                  
                  
                  5,054
                  
                  
                  
                  -
                  
                  
                  
                  1,085
                  
                  
                  
                  3,969Other
      debt securities
                  
                  
                  3,658
                  
                  
                  
                  1
                  
                  
                  
                  131
                  
                  
                  
                  3,528Equity
      securities
                  
                  
                  527
                  
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  517$
                  223,882
                  
                  
                  $
                  4,956
                  
                  
                  $
                  1,693
                  
                  
                  $
                  227,145June
      30, 2008:U.S.
      Treasury securities
                  
                  $
                  512
                  
                  
                  $
                  20
                  
                  
                  $
                  -
                  
                  
                  $
                  532U.S.
      Government sponsored entities
                  
                  
                  26,785
                  
                  
                  
                  246
                  
                  
                  
                  -
                  
                  
                  
                  27,031Mortgage-backed
      investments
                  
                  
                  140,509
                  
                  
                  
                  478
                  
                  
                  
                  1,137
                  
                  
                  
                  139,850Obligations
      of states and political subdivisions
                  
                  
                  61,141
                  
                  
                  
                  371
                  
                  
                  
                  565
                  
                  
                  
                  60,947Collateralized
      debt obligations
                  
                  
                  5,025
                  
                  
                  
                  -
                  
                  
                  
                  548
                  
                  
                  
                  4,477Other
      debt securities
                  
                  
                  3,677
                  
                  
                  
                  11
                  
                  
                  
                  11
                  
                  
                  
                  3,677Equity
      securities
                  
                  
                  423
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  422$
                  238,072
                  
                  
                  $
                  1,126
                  
                  
                  $
                  2,262
                  
                  
                  $
                  236,936





Fair
values are determined primarily from prices obtained from an independent,
nationally recognized pricing service. These prices include exchange quoted
prices, dealer quoted prices and prices derived from market yields published by
specialized financial database providers. Mortgage-backed securities trade in a
dealer market, and therefore the prices used are derived from dealer quotes.
Most non-rated municipal securities and certain corporate securities are not
actively traded or quoted in a dealer market. These securities are valued using
dealer provided market yields in a matrix that incorporates other factors such
as credit standing and tax status. The collateralized debt obligations are
valued based on dealer quotes, expected cash flows, discount rates for
securities similar to the CDO collateral, liquidity factors and credit quality
assumptions about the underlying financial institution trust preferred
obligors.




17




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Provided
below is a summary of securities available for sale which were in an unrealized
loss position and the length of time that individual securities have been in a
continuous loss position at June 30, 2009 and December 31, 2008. 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
                                          
                                          
                                          LossesJune
      30, 2009:U.S.
      Government sponsoredentities
                                          
                                          $
                                          30,508
                                          
                                          
                                          $
                                          176
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          30,508
                                          
                                          
                                          $
                                          176Mortgage-backed
      investments
                                          
                                          
                                          49,833
                                          
                                          
                                          
                                          218
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          49,833
                                          
                                          
                                          
                                          218Obligations
      of states andpolitical
      subdivisions
                                          
                                          
                                          15,624
                                          
                                          
                                          
                                          224
                                          
                                          
                                          
                                          3,988
                                          
                                          
                                          
                                          67
                                          
                                          
                                          
                                          19,612
                                          
                                          
                                          
                                          291Collateralized
      debt obligations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,254
                                          
                                          
                                          
                                          1,594
                                          
                                          
                                          
                                          3,254
                                          
                                          
                                          
                                          1,594Other
      debt securities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Equity
      securities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          362
                                          
                                          
                                          
                                          50
                                          
                                          
                                          
                                          362
                                          
                                          
                                          
                                          50$
                                          95,965
                                          
                                          
                                          $
                                          618
                                          
                                          
                                          $
                                          7,604
                                          
                                          
                                          $
                                          1,711
                                          
                                          
                                          $
                                          103,569
                                          
                                          
                                          $
                                          2,329December
      31, 2008:U.S.
      Government sponsoredentities
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Mortgage-backed
      investments
                                          
                                          
                                          14,847
                                          
                                          
                                          
                                          89
                                          
                                          
                                          
                                          1,802
                                          
                                          
                                          
                                          9
                                          
                                          
                                          
                                          16,649
                                          
                                          
                                          
                                          98Obligations
      of states andpolitical
      subdivisions
                                          
                                          
                                          26,067
                                          
                                          
                                          
                                          249
                                          
                                          
                                          
                                          2,275
                                          
                                          
                                          
                                          120
                                          
                                          
                                          
                                          28,342
                                          
                                          
                                          
                                          369Collateralized
      debt obligations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,969
                                          
                                          
                                          
                                          1,085
                                          
                                          
                                          
                                          3,969
                                          
                                          
                                          
                                          1,085Other
      debt securities
                                          
                                          
                                          3,014
                                          
                                          
                                          
                                          131
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,014
                                          
                                          
                                          
                                          131Equity
      securities
                                          
                                          
                                          527
                                          
                                          
                                          
                                          10
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          527
                                          
                                          
                                          
                                          10$
                                          44,455
                                          
                                          
                                          $
                                          479
                                          
                                          
                                          $
                                          8,046
                                          
                                          
                                          $
                                          1,214
                                          
                                          
                                          $
                                          52,501
                                          
                                          
                                          $
                                          1,693





Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. The unrealized
losses associated with 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. 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.




18





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





There are
6 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, as well as to
the estimated effects of the sub-prime mortgage crisis on the financial
stability of financial institution issuers of the trust preferred collateral. In
December 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 the some of the CDOs were closed by federal
regulators. These defaults, accompanied by interest deferrals by several other
bank issuers, resulted in reductions in fair value estimates as credit
assumptions had to be revised. Management evaluated these instruments for
impairment as of June 30, 2009 within the guidelines of FASB’s EITF 99-20 as
amended by FSP No. EITF 99-20-1 using the discounted cash flow approach
prescribed, adjusted for assumptions concerning the estimates of ultimate
collectability of the contractual cash flows, and determined that an
other-than-temporary impairment (OTTI) condition existed for one of the CDOs
that had an amortized cost of $751 thousand and a fair value of $358 thousand. A
cash flow analysis for the security, after allowing for estimated defaults and
the cash requirements of the more senior securities in the CDO, indicated an
other-than-temporary credit-related impairment of $175 thousand. The
credit-related portion of the impairment was charged against current earnings
with the remaining unrealized loss of $218 thousand being charged to other
comprehensive income. The other-than-temporarily impaired CDO was placed on
nonaccrual status during the second quarter resulting in an $18 thousand
reversal of interest income on taxable investments. The interest payment for
another CDO was deferred, with expectations for continued deferrals in 2009.
This CDO, with an amortized cost of $1.000 million and a fair value of $689
thousand, was placed on nonaccrual status during the second quarter resulting in
a $66 thousand reversal of interest income on taxable investments. The
unrealized losses by individual security in the CDO portfolio as of June 30,
2009 ranged from 29% of amortized cost to 39% of amortized cost. The five
securities that passed the cash flow testing for OTTIs did so due to their
seniority in the CDO cash flow structure and the estimated effects of defaults
and deferrals of the collateral pools as compared with the security that was
determined to have an OTTI. Therefore, given the expected default and deferral
rates that were estimated for the collateral in the CDOs, the more subordinate
securities in those CDOs absorbed the losses in the OTTI tests, allowing the
securities owned by the Company to show sufficient cash flows to eventually pay
off the security.





The
following table summarizes the 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
                    
                    
                    Six MonthsEnded June 30
                    
                    
                    Ended June 302009
                    
                    
                    2009Beginning
      balance
                    
                    $
                    -
                    
                    
                    $
                    -Additions
                    
                    
                    175
                    
                    
                    
                    175Ending
      balance
                    
                    $
                    175
                    
                    
                    $
                    175





The fair
values of our investment securities could decline in the future if the
underlying performance of the collateral for the trust preferred CDOs
deteriorate 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 significant 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 June 30
                        
                        
                        Six Months Ended June 302009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Proceeds
      from sales
                        
                        $
                        170
                        
                        
                        $
                        1,350
                        
                        
                        $
                        1,835
                        
                        
                        $
                        3,578Gross
      realized gains
                        
                        
                        1
                        
                        
                        
                        11
                        
                        
                        
                        1
                        
                        
                        
                        22Gross
      realized losses
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Gross
      recognized losses related tothe
      credit component of other-than-temporary
      impairments
                        
                        $
                        175
                        
                        
                        $
                        -
                        
                        
                        $
                        175
                        
                        
                        $
                        -





Securities
with a carrying value totaling $265.988 million at June 30, 2009 and $209.310
million at December 31, 2008 were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.




19




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





The
amortized cost and fair values of debt securities available for sale at June 30,
2009, 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
                
                $
                34,070
                
                
                $
                34,239After
      one through five years
                
                
                62,565
                
                
                
                63,167After
      five through ten years
                
                
                23,361
                
                
                
                23,505After
      ten years
                
                
                5,708
                
                
                
                4,112125,704
                
                
                
                125,023Mortgage-backed
      investments
                
                
                200,163
                
                
                
                204,917$
                325,867
                
                
                $
                329,940





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)
                
                June 30, 2009
                
                
                December 31, 2008Notional
                
                
                Positive
                
                
                Negative
                
                
                Notional
                
                
                Positive
                
                
                NegativeInstrument
                
                Amount
                
                
                Fair Value
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value
                
                
                Fair ValueForward
      sale contracts
                
                $
                6,850
                
                
                $
                41
                
                
                $
                31
                
                
                $
                5,568
                
                
                $
                10
                
                
                $
                13Written
      interest rate options (locks)
                
                
                9,265
                
                
                
                83
                
                
                
                24
                
                
                
                8,379
                
                
                
                35
                
                
                
                14





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 June 30
                        
                        
                        Six Months Ended June 302009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Forward
      sale contracts:Recorded
      in mortgage banking income
                        
                        $
                        16
                        
                        
                        $
                        37
                        
                        
                        $
                        13
                        
                        
                        $
                        48Written
      interest rate options (locks)Recorded
      in mortgage banking income
                        
                        
                        76
                        
                        
                        
                        (4
                        )
                        
                        
                        33
                        
                        
                        
                        9




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)
                
                June
      30
                
                
                December
      312009
                
                
                2008
                
                
                2008Commercial,
      financial and agricultural
                
                $
                135,325
                
                
                $
                139,933
                
                
                $
                127,704Non-residential
      real estate
                
                
                672,359
                
                
                
                752,437
                
                
                
                745,700Residential
      real estate
                
                
                205,068
                
                
                
                210,813
                
                
                
                209,696Home
      equity loans
                
                
                44,827
                
                
                
                45,623
                
                
                
                45,791Consumer
      loans
                
                
                40,728
                
                
                
                39,501
                
                
                
                37,908Other
      loans
                
                
                9,434
                
                
                
                6,895
                
                
                
                9,796Total
      loans
                
                $
                1,107,741
                
                
                $
                1,195,202
                
                
                $
                1,176,595





The Bank
uses real estate loans as collateral for borrowings at the Federal Home Loan
Banks. Approximately $847.635 million of real estate loans were pledged under a
blanket lien as collateral for FHLB borrowings at June 30, 2009. The Bank uses
commercial and consumer loans as collateral for borrowings at the Federal
Reserve Bank Discount Window. Approximately $25.967 million of commercial and
consumer loans were pledged for the Federal Reserve line of credit at June 30,
2009.





The
following table is a summary of the activity in the allowance for loan losses
for the second quarter and year-to-date periods ending June 30,
2009.





(Dollars
      in thousands)
                  
                  Three
      Months Ended June 30
                  
                  
                  Six
      Months Ended June 302009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  41,506
                  
                  
                  $
                  14,196
                  
                  
                  $
                  24,918
                  
                  
                  $
                  14,217Loans
      charged off
                  
                  
                  (19,579
                  )
                  
                  
                  (1,517
                  )
                  
                  
                  (23,087
                  )
                  
                  
                  (2,557
                  )Recoveries
                  
                  
                  201
                  
                  
                  
                  142
                  
                  
                  
                  457
                  
                  
                  
                  381Net
      charge-offs
                  
                  
                  (19,378
                  )
                  
                  
                  (1,375
                  )
                  
                  
                  (22,630
                  )
                  
                  
                  (2,176
                  )Provision
      for loan losses
                  
                  
                  9,195
                  
                  
                  
                  6,080
                  
                  
                  
                  29,035
                  
                  
                  
                  6,860Ending
      balance
                  
                  $
                  31,323
                  
                  
                  $
                  18,901
                  
                  
                  $
                  31,323
                  
                  
                  $
                  18,901





The
provision for loan losses for the first six months of 2009 included
approximately $24.572 million related to individual loan impairments. The
magnitude of the quarterly allowance depends upon the effect of economic and
market factors on collateral values, the state of the economies local to our
customers, historical loss patterns for different types of loans, the timing and
extent of downgrades of customer borrowings as well as other qualitative
factors.




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)
                    
                    June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Nonaccrual
      loans
                    
                    $
                    74,420
                    
                    
                    $
                    20,564Other
      real estate
                    
                    
                    22,575
                    
                    
                    
                    11,061Total
      non-performing credit-related assets
                    
                    $
                    96,995
                    
                    
                    $
                    31,625Past
      due 90 days or more and stillaccruing
    interest
                    
                    
                    5,608
                    
                    
                    
                    5,686Restructured
      loans (accruing)
                    
                    
                    3,633
                    
                    
                    
                    3,664





Loans are
considered impaired when, based on current information and events, it is
probable the Company will be unable to collect all amounts due in accordance
with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. If a loan is impaired, a specific valuation
allowance is allocated, if necessary, so that the loan is reported net, at the
present value of estimated future cash flows using the loan’s existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Interest payments on impaired loans are typically applied to
principal unless collectability of the principal amount is reasonably assured,
in which case interest is recognized on a cash basis. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.





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





(Dollars
      in thousands)
                
                June
      30, 2009
                
                
                December
      31, 2008Balance
      of impaired loans with an allocated allowance
                
                $
                58,298
                
                
                $
                58,966Balance
      of impaired loans with no allocated allowance
                
                
                93,957
                
                
                
                39,468Total
      recorded investment in impaired loans
                
                $
                152,255
                
                
                $
                98,434Amount
      of the allowance allocated to impaired loans
                
                $
                17,291
                
                
                $
                13,282





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, 2007
                  
                  $
                  32,572
                  
                  
                  $
                  6,292
                  
                  
                  $
                  228
                  
                  
                  $
                  67
                  
                  
                  $
                  1,025Amortization
      expense
                  
                  
                  -
                  
                  
                  
                  (214
                  )
                  
                  
                  (14
                  )
                  
                  
                  (14
                  )
                  
                  
                  -Balance
      at June 30, 2008
                  
                  $
                  32,572
                  
                  
                  $
                  6,078
                  
                  
                  $
                  214
                  
                  
                  $
                  53
                  
                  
                  $
                  1,025Balance
      at December 31, 2008
                  
                  $
                  32,572
                  
                  
                  $
                  5,865
                  
                  
                  $
                  198
                  
                  
                  $
                  39
                  
                  
                  $
                  1,025Amortization
      expense
                  
                  
                  -
                  
                  
                  
                  (212
                  )
                  
                  
                  (7
                  )
                  
                  
                  (7
                  )
                  
                  
                  -Impairment
      charge
                  
                  
                  (15,800
                  )
                  
                  
                  -
                  
                  
                  
                  (191
                  )
                  
                  
                  (32
                  )
                  
                  
                  (1,025
                  )Balance
      at June 30, 2009
                  
                  $
                  16,772
                  
                  
                  $
                  5,653
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Estimated amortization
    expenseRemainder
      of 2009
                  
                  
                  
                  
                  
                  $
                  2152010
                  
                  
                  
                  
                  
                  
                  4272011
                  
                  
                  
                  
                  
                  
                  4272012
                  
                  
                  
                  
                  
                  
                  4272013
                  
                  
                  
                  
                  
                  
                  4272014
                  
                  
                  
                  
                  
                  
                  427





Goodwill
is tested for impairment annually during the first quarter of each year. A
special impairment test as of December 31, 2008, performed internally, showed no
impairment. A subsequent impairment test, triggered by the large first quarter
loan loss accruals and continued decline in the Company’s common share price,
was performed as of March 31, 2009. Step 1 of the test indicated that the net
assets of the community banking unit of the Company had a fair value of less
than their book value. Therefore, Step 2 was performed to determine if goodwill
was an impaired asset in the allocation of the value of the community banking
unit through the allocation of fair values to all of the identifiable assets and
liabilities, both recorded and unrecorded, of the unit. The completion of this
step resulted in the carrying value of goodwill exceeding its implied fair value
by $15.800 million. Therefore, an impairment charge to the community banking
unit’s goodwill was recorded during the first quarter of 2009.




23





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
5:  (Continued)





The
decline in the Company’s stock price from $6.12 per share at March 31, 2009 to
$4.07 per share at June 30, 2009 prompted Management to update the Step 1
calculation of the impairment test that was performed as of March 31. An
analysis of market data related to community bank deals for banks similar to the
Company indicated that the Step 1 valuation of the Company would result in a
similar bank fair value estimate as the prior March 31 analysis. Therefore,
using this data, Management determined that the estimated fair value of the
banking unit exceeded its net book value and concluded that no additional
impairment was indicated.





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





The
agency customer renewal lists and noncompete agreements arose from acquisitions
of insurance agencies by M&F Insurance Group, Inc. 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 to fully write off the remaining
balances of the assets.





Note 6:  Variable
Interest Entity and Borrowing Arrangements





The
following is a summary of other borrowings at June 30, 2009 and 2008 and
December 31, 2008:





(Dollars
      in thousands)
                
                June
      30
                
                
                December
      312009
                
                
                2008
                
                
                2008Company’s
      line of credit in the amount of $10,000,000, maturing in August 2009;
      secured by approximately 29% of the Bank’s common stock; interest payable
      quarterly at .75% below the lender’s base rate
                
                $
                2,416
                
                
                $
                2,416
                
                
                $
                2,416Bank’s
      advances from Federal Home Loan Banks, net of unamortized purchase
      accounting discounts of $0, $5  and $0
                
                
                133,559
                
                
                
                149,868
                
                
                
                149,131Other
      mortgages to third parties on other real estate
                
                
                -
                
                
                
                83
                
                
                
                -$
                135,975
                
                
                $
                152,367
                
                
                $
                151,547Company’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 risk-based capital ratios, allowance for loan loss as a percent of
nonperforming loans, return on assets, nonperforming loans as a percent of loans
and certain supervisory actions. The net losses for the first and second
quarters of 2009 and the increase in non-performing loans caused the Company to
be in violation of the return on assets covenant and additionally to be in
violation of the nonperforming loan covenant. The correspondent bank has granted
a temporary waiver of these covenant violations.





The Bank
has advances from the Federal Home Loan Bank of Dallas (FHLB) under Blanket
Agreements for Advances and Security Agreements. Advances are collateralized by
a blanket floating lien on certain real estate-secured loans, certain pledged
securities, the FHLB capital stock owned by the Company and any funds on deposit
with the FHLB. These agreements allow the Bank to borrow funds from the FHLB to
fund mortgage loan programs and to satisfy certain other funding
needs.


24


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
6:  (Continued)





The Bank
has access to the Federal Reserve Bank’s Discount Window for a line of credit of
$16.878 million. The line is collateralized by commercial and consumer loans.
The Bank did not utilize the line during the first six months of
2009.





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.





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 after May 15, 2012. Prior to this date, except as permitted
under the American Recovery and Reinvestment Act of 2009 and other agreements
with the U. S. Treasury, the Company may redeem the Class B, Series A Preferred
Stock in whole or in part at par if (1) the Company has raised aggregate gross
proceeds in one or more Qualified Equity Offerings in excess of $7.5 million,
and (2) the aggregate redemption price does not exceed the aggregate net
proceeds from such Qualified Equity Offerings. Any redemption is subject to the
consent of the Federal Reserve Bank of St. Louis, which is the Company’s primary
Federal banking regulator.





Upon
issuance, the fair values of the Class B, Series A Preferred Stock and the
associated warrant were computed as if the instruments were issued on a stand
alone basis. The fair value of the preferred stock was estimated based on the
observed market values for bank preferred stock-related investments adjusted for
the estimated lack of liquidity for the sale of a new issue of preferred stock
by a small community bank. The analysis resulted in an estimated stand-alone
fair value of the Class B, Series A Preferred Stock of $13.864 million. The
Company used an options pricing model to estimate the fair value of the warrant,
resulting in a stand-alone fair value of $660 thousand. The most significant and
unobservable assumption in this valuation was volatility. The Company used an
estimated value based on a combination of the ten-year, five-year, and one-year
calculations of the trading volatility of its Common Stock, which the Company
believed would be similar to the estimate used by market participants. The
individual fair values were used to record the preferred stock and associated
warrant on a relative fair value basis, with the warrants being recorded in
Additional Paid-in Capital and the preferred stock being recorded at a discount
of approximately $1.363 million. Accretion of the discount associated with the
preferred stock is recognized as an increase to preferred stock dividends in
determining net income available to common shareholders. The discount is being
amortized over a five-year period using the effective yield method. The discount
recognized during the first half of 2009 was $80 thousand, with $60 thousand
being recognized during the second quarter.





Decrease in common stock
dividend





On May
13, 2009 the Board of Directors reduced the Company’s quarterly common stock
dividend from $0.13 per share to $0.01 per share, effective with the dividend
paid on June 30, 2009 to shareholders of record on June 17,
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, 2008 financial statements, the Bank has
a defined benefit pension plan covering substantially all full time employees of
the Bank and its subsidiaries. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” as of December 31, 2006. The Company
adopted the measurement date provisions of SFAS No. 158 as of December 31, 2008.
The following table provides a summary of the components of the Unamortized
Pension Costs recognized in stockholders’ equity as of June 30, 2009 and
December 31, 2008:





(Dollars
      in thousands)
                
                Balance
                
                
                2009
                
                
                Balance12/31/08
                
                
                Amortization
                
                
                06/30/09Unamortized
      transition asset
                
                $
                (7
                )
                
                $
                4
                
                
                $
                (3
                )Unamortized
      prior service cost
                
                
                (99
                )
                
                
                18
                
                
                
                (81
                )Unamortized
      actuarial loss
                
                
                4,529
                
                
                
                (453
                )
                
                
                4,0764,423
                
                
                
                (431
                )
                
                
                3,992Deferred
      taxes
                
                
                (1,650
                )
                
                
                161
                
                
                
                (1,489
                )Net
      unamortized pension costs
                
                $
                2,773
                
                
                $
                (270
                )
                
                $
                2,503





The
following is a summary of the components of net periodic benefit costs for the
three and six-month periods ended June 30, 2009 and 2008:





(Dollars
      in thousands)
                
                Three
      Months Ended June 30
                
                
                Six
      Months Ended June 302009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                122
                
                
                
                115
                
                
                
                243
                
                
                
                230Expected
      return on plan assets
                
                
                (118
                )
                
                
                (155
                )
                
                
                (235
                )
                
                
                (310
                )Amortization
      of transition asset
                
                
                (2
                )
                
                
                (3
                )
                
                
                (4
                )
                
                
                (5
                )Amortization
      of prior service costs
                
                
                (9
                )
                
                
                (9
                )
                
                
                (18
                )
                
                
                (18
                )Recognized
      actuarial loss
                
                
                227
                
                
                
                82
                
                
                
                453
                
                
                
                163Net
      pension cost
                
                $
                220
                
                
                $
                30
                
                
                $
                439
                
                
                $
                60





The
Company did not make any contributions to the pension plan during the first half
of 2008 and 2009. The Company has not determined the level of contributions to
make to the pension plan during 2009.





The
Company made $75 thousand in contributions to the ESOP and $234 thousand in
matching contributions to the 401k plan during the first six months of 2009. The
Company made $75 thousand in contributions to the ESOP and $363 thousand in
matching contributions to the 401k plan during the first six months of
2008.





The
Company has a nonqualified deferred compensation plan for certain senior
officers. Participants deferred $32 thousand of compensation and received $24
thousand in distributions during the first six months of 2009. Participants
deferred $53 thousand of compensation and received $31 thousand in distributions
during the first six months of 2008. Employee benefit expenses include credits
for earnings declines attributed to the participants’ accounts of $81 thousand
for the first six months of 2009 and $7 thousand for the first six months of
2008. The plan incurred $1 thousand of expenses during the first six months of
2009 and $1 thousand during the first six months of 2008. Liabilities of the
plan were $341 thousand at June 30, 2009 and $448 thousand at June 30, 2008,
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 adopted Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), “Share-Based Payment”, as of July 1, 2005. SFAS No. 123R
requires the use of the fair value method of accounting for stock-based
compensation. The Company adopted the modified prospective method of transition
whereby stock-based compensation expense is recognized prospectively for all
stock-based awards that were not fully vested as of the date of adoption of the
Statement, and for all awards issued thereafter.





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





The fair
value of stock options is estimated at the date of grant using the Black-Scholes
option pricing model.





The
following table is a summary of outstanding options and weighted average
exercise prices:





Six Months Ended June 302009
                
                
                2008Number
                
                
                Price
                
                
                Number
                
                
                PriceJanuary
      1
                
                
                135,500
                
                
                $
                16.04
                
                
                
                128,500
                
                
                $
                16.16Expired
                
                
                (99,500
                )
                
                
                16.23
                
                
                
                -
                
                
                
                -Cancelled
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Granted
                
                
                4,000
                
                
                
                5.14
                
                
                
                7,000
                
                
                
                13.84June
      30
                
                
                40,000
                
                
                $
                14.28
                
                
                
                135,500
                
                
                $
                16.04Exercisable
      at June 30, 2009
                
                
                24,200
                
                
                $
                15.27Available
      for additional grant at June 30, 2009
                
                
                380,984





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
June 30, 2009, there were $33 thousand in unrecognized compensation costs
related to stock option awards.





In August
and December 2005, in December 2006 and in December 2007 the Company issued
restricted stock awards to certain senior officers of the Company. The shares
vest in one (1) to seven (7) years and are potentially forfeitable until the
vesting date. Additionally the shares include a performance condition that may
accelerate vesting at the achievement of a diluted earnings per share and net
income target. Non-achievement of the performance condition during the vesting
period would not prevent vesting of the shares. At June 30, 2009, there were
$819 thousand in unrecognized compensation costs. The Company estimates that
4.00% (.57% annual rate) of the nonvested shares will be forfeited in
determining net compensation expenses recognized. In December 2007, 1,500 shares
of restricted stock with a fair value of $24 thousand became fully vested and
outstanding. In August 2008, 1,766 shares of restricted stock with a fair value
of $19 thousand became fully vested and outstanding, and in December 2008, 1,500
shares of restricted stock with a fair value of $13 thousand became fully vested
and outstanding. In May 2009, 6,000 shares of restricted stock with a fair value
of $26 thousand became fully vested and outstanding. The following table
provides a summary of the restricted share activity:





Grant
      DateShares
                  
                  
                  Fair
      ValueJanuary
      1, 2008
                  
                  
                  123,516
                  
                  
                  $
                  16.89Forfeited
      in 2008
                  
                  
                  (14,000
                  )
                  
                  
                  17.08Vested
      in 2008
                  
                  
                  (3,266
                  )
                  
                  
                  18.23December
      31, 2008
                  
                  
                  106,250
                  
                  
                  
                  16.82Forfeited
      in 2009
                  
                  
                  (8,000
                  )
                  
                  
                  16.86Vested
      in 2009
                  
                  
                  (6,000
                  )
                  
                  
                  16.86June
      30, 2009
                  
                  
                  92,250
                  
                  
                  $
                  16.82


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
                        
                        
                        NetJune
      30, 2009:Net
      unrealized gain on securities available for sale
                        
                        $
                        4,241
                        
                        
                        $
                        1,580
                        
                        
                        $
                        2,661Net
      unrealized loss on other-than-temporarily impairedsecurities
      available for sale
                        
                        
                        (218
                        )
                        
                        
                        (81
                        )
                        
                        
                        (137
                        )Net
      unamortized pension costs
                        
                        
                        (3,992
                        )
                        
                        
                        (1,489
                        )
                        
                        
                        (2,503
                        )$
                        31
                        
                        
                        $
                        10
                        
                        
                        $
                        21December
      31, 2008:Net
      unrealized loss on securities available for sale
                        
                        $
                        3,263
                        
                        
                        $
                        1,217
                        
                        
                        $
                        2,046Net
      unamortized pension costs
                        
                        
                        (4,423
                        )
                        
                        
                        (1,650
                        )
                        
                        
                        (2,773
                        )$
                        (1,160
                        )
                        
                        $
                        (433
                        )
                        
                        $
                        (727
                        )June
      30, 2008:Net
      unrealized loss on securities available for sale
                        
                        $
                        (1,136
                        )
                        
                        $
                        (423
                        )
                        
                        $
                        (713
                        )Net
      unamortized pension costs
                        
                        
                        (1,652
                        )
                        
                        
                        (616
                        )
                        
                        
                        (1,036
                        )$
                        (2,788
                        )
                        
                        $
                        (1,039
                        )
                        
                        $
                        (1,749
                        )





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 June 30, 2009, that all capital
adequacy requirements have been met.





As of
June 30, 2009, 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 June 30, 2009, and
December 31, 2008, are also presented in the table:





(Dollars
      in thousands)
                  
                  Actual
                  
                  
                  Minimum
      Capital
                  
                  
                  Well
      CapitalizedAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioJune
      30, 2009:Total
      capital (to risk weighted assets):Company
                  
                  $
                  158,304
                  
                  
                  
                  12.5
                  %
                  
                  $
                  101,219
                  
                  
                  
                  8.0
                  %
                  
                  $
                  -
                  
                  
                  
                  -Bank
                  
                  
                  149,520
                  
                  
                  
                  11.8
                  %
                  
                  
                  101,034
                  
                  
                  
                  8.0
                  %
                  
                  
                  126,293
                  
                  
                  
                  10.0
                  %Tier
      I capital (to risk weighted assets):Company
                  
                  
                  142,297
                  
                  
                  
                  11.3
                  %
                  
                  
                  50,609
                  
                  
                  
                  4.0
                  %
                  
                  
                  -
                  
                  
                  
                  -Bank
                  
                  
                  133,541
                  
                  
                  
                  10.8
                  %
                  
                  
                  50,517
                  
                  
                  
                  4.0
                  %
                  
                  
                  75,776
                  
                  
                  
                  6.0
                  %Tier
      I capital (to average assets):Company
                  
                  
                  142,297
                  
                  
                  
                  8.9
                  %
                  
                  
                  63,626
                  
                  
                  
                  4.0
                  %
                  
                  
                  -
                  
                  
                  
                  -Bank
                  
                  
                  133,541
                  
                  
                  
                  8.4
                  %
                  
                  
                  63,600
                  
                  
                  
                  4.0
                  %
                  
                  
                  79,500
                  
                  
                  
                  5.0
                  %December
      31, 2008:Total
      capital (to risk weighted assets):Company
                  
                  $
                  145,511
                  
                  
                  
                  11.2
                  %
                  
                  $
                  103,839
                  
                  
                  
                  8.0
                  %
                  
                  $
                  -
                  
                  
                  
                  -Bank
                  
                  
                  146,691
                  
                  
                  
                  11.3
                  %
                  
                  
                  103,692
                  
                  
                  
                  8.0
                  %
                  
                  
                  129,615
                  
                  
                  
                  10.0
                  %Tier
      I capital (to risk weighted assets):Company
                  
                  
                  129,179
                  
                  
                  
                  10.0
                  %
                  
                  
                  51,920
                  
                  
                  
                  4.0
                  %
                  
                  
                  -
                  
                  
                  
                  -Bank
                  
                  
                  130,382
                  
                  
                  
                  10.1
                  %
                  
                  
                  51,846
                  
                  
                  
                  4.0
                  %
                  
                  
                  77,769
                  
                  
                  
                  6.0
                  %Tier
      I capital (to average assets):Company
                  
                  
                  129,179
                  
                  
                  
                  8.2
                  %
                  
                  
                  63,111
                  
                  
                  
                  4.0
                  %
                  
                  
                  -
                  
                  
                  
                  -Bank
                  
                  
                  130,382
                  
                  
                  
                  8.3
                  %
                  
                  
                  63,071
                  
                  
                  
                  4.0
                  %
                  
                  
                  78,839
                  
                  
                  
                  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 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.  These restrictions are not anticipated to
have a material effect on the ability of the Bank to pay dividends to the
Company. As mentioned in Note 7, “Preferred Stock, Common Stock Warrant and
Dividend” the Company participates in the U.S. Treasury’s Capital Purchase
Program. In this program, the Company generally may not raise the quarterly
dividend beyond $0.13 per share, the amount that was in place when the Company
received the preferred stock proceeds, during the first three years without the
consent of the U.S. Department of Treasury.


29


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 12:  Earnings
Per Share





Effective
January 1, 2009, the Company adopted Financial Accounting Standards Board Staff
Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The Corporation has determined that
its outstanding non-vested restricted stock awards are participating securities.
Accordingly, effective January 1, 2009, earnings per common share are computed
using the two-class method prescribed by SFAS No. 128, “Earnings Per Share.” All
previously reported earnings per common share data has been retrospectively
adjusted to conform to the new computation method.





(Dollars
      in thousands, except per share data)
                
                Three
      Months Ended June 30
                
                
                Six
      Months Ended June 302009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (5,111
                )
                
                $
                (466
                )
                
                $
                (32,352
                )
                
                $
                2,673Preferred
      dividends
                
                
                439
                
                
                
                -
                
                
                
                593
                
                
                
                -Net
      income (loss) attributable to common stock
                
                
                (5,550
                )
                
                
                (466
                )
                
                
                (32,945
                )
                
                
                2,673Net
      income (loss) allocated to common stockholders:Distributed
                
                
                91
                
                
                
                1,178
                
                
                
                1,269
                
                
                
                2,356Undistributed
                
                
                (5,589
                )
                
                
                (1,636
                )
                
                
                (33,856
                )
                
                
                283$
                (5,498
                )
                
                $
                (458
                )
                
                $
                (32,587
                )
                
                $
                2,639Weighted-average
      basic common and participating shares outstanding
                
                
                9,161,662
                
                
                
                9,179,288
                
                
                
                9,163,574
                
                
                
                9,183,557Less:
      weighted average participating restricted shares
    Outstanding
                
                
                96,272
                
                
                
                119,208
                
                
                
                99,200
                
                
                
                121,362Weighted-average
      basic shares outstanding
                
                
                9,065,390
                
                
                
                9,060,080
                
                
                
                9,064,374
                
                
                
                9,062,195Basic
      net income (loss) per share
                
                $
                (.61
                )
                
                $
                (.05
                )
                
                $
                (3.60
                )
                
                $
                .29Weighted-average
      basic common and participating shares outstanding
                
                
                9,161,662
                
                
                
                9,179,288
                
                
                
                9,163,574
                
                
                
                9,183,557Add:
      share-based options and stock warrant
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,6389,161,662
                
                
                
                9,179,288
                
                
                
                9,163,574
                
                
                
                9,185,195Less:
      weighted average participating restricted shares
    Outstanding
                
                
                96,272
                
                
                
                119,208
                
                
                
                99,200
                
                
                
                121,362Weighted-average
      dilutive shares outstanding
                
                
                9,065,390
                
                
                
                9,060,080
                
                
                
                9,064,374
                
                
                
                9,063,833Dilutive
      net income (loss) per share
                
                $
                (.61
                )
                
                $
                (.05
                )
                
                $
                (3.60
                )
                
                $
                .29Weighted-average
      shares of potentially dilutive Instruments that are not included in the
      dilutive share Calculation due to anti-dilutive effect:Compensation
      plan-related stock options
                
                
                39,380
                
                
                
                123,192
                
                
                
                87,175
                
                
                
                120,846Common
      stock warrant
                
                
                513,113
                
                
                
                -
                
                
                
                351,525
                
                
                
                -





Note
13:  Subsequent Events





Financial
statements are considered available to be issued when they are complete in a
form and format that complies with generally accepted accounting principles and
all approvals necessary for issuance have been obtained. Management has
evaluated all events or transactions that occurred after June 30, 2009 up
through August 7, 2009, the date we issued these financial statements. No
material subsequent events have occurred during this period that required
recognition or disclosure in these financial statements.


30


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.




31


FIRST M
& F CORPORATION





Financial
Summary





The
Company incurred a net loss for the second quarter of 2009 of $5.111 million, or
$.61 basic and diluted loss per share as compared to losses of $466 thousand, or
$.05 basic and diluted loss per share for the same period in 2008 and a net loss
of $27.241 million or $2.99 basic and diluted loss per share for the first
quarter of 2009. The net loss for the first half of 2009 was $32.352 million or
$3.60 basic and diluted loss per share as compared to net income of $2.673
million, or $.29 basic and diluted earnings per share for the same period in
2008. Major factors contributing to the decrease in year-over-year earnings were
(1) an increase of $22.175 million in loan loss accruals as compared to 2008,
(2) a decrease of $87.461 million in loans outstanding from the second quarter
of 2008 to the second quarter of 2009, (3) a net interest margin of 3.25% for
the first half of 2009 as compared to 3.69% for the first half of 2008, (4) a
goodwill impairment charge of $15.800 million during the first quarter of 2009,
and (5) additional intangible asset impairment charges of $1.248 million during
the first quarter of 2009.





Highlights
for the first half of 2009 and 2008 are as follows:





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


·
            Debit
      card revenues increased by 45.12% for the second quarter of 2009 over the
      second quarter of 2008


·
            The
      net interest margin decreased to 3.16% in the second quarter of 2009 from
      3.33% in the first quarter of 2009 and 3.73% in the second quarter of
      2008


·
            Loans
      held for investment decreased by $68.854 million during the first half of
      2009 and by $24.233 million during the first half of
  2008


·
            Nonaccrual
      loans were 6.69% of total loans at June 30, 2009 as compared to 1.74% at
      December 31, 2008 and .94% at June 30,
2008


·
            Annualized
      net charge-offs were 6.87% for the second quarter of 2009 as compared to
      1.13% for the first quarter of 2009, to 1.79% for the fourth quarter of
      2008 and .46% for the second quarter of
2008


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




32


FIRST M
& F CORPORATION





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





(Net change, in
thousands)


Non-Interest
                  
                  
                  InterestLoans
                  
                  
                  Bearing
      Deposits
                  
                  
                  Bearing
      Deposits2nd
      Qtr 2008
                  
                  $
                  (10,966
                  )
                  
                  $
                  65
                  
                  
                  $
                  (45,263
                  )3rd
      Qtr 2008
                  
                  
                  11,011
                  
                  
                  
                  (8,165
                  )
                  
                  
                  (8,749
                  )4thQtr
      2008
                  
                  
                  (29,618
                  )
                  
                  
                  (291
                  )
                  
                  
                  10,2151st
      Qtr 2009
                  
                  
                  (27,343
                  )
                  
                  
                  12,697
                  
                  
                  
                  39,0762nd
      Qtr 2009
                  
                  
                  (41,511
                  )
                  
                  
                  (10,223
                  )
                  
                  
                  6,610





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
                  
                  
                  Expense2nd
      Qtr 2008
                  
                  $
                  13,100
                  
                  
                  $
                  6,080
                  
                  
                  $
                  5,270
                  
                  
                  $
                  13,4603rd
      Qtr 2008
                  
                  
                  13,020
                  
                  
                  
                  2,190
                  
                  
                  
                  5,517
                  
                  
                  
                  13,2294th
      Qtr 2008
                  
                  
                  12,749
                  
                  
                  
                  10,684
                  
                  
                  
                  4,832
                  
                  
                  
                  14,2411st
      Qtr 2009
                  
                  
                  11,844
                  
                  
                  
                  19,840
                  
                  
                  
                  5,188
                  
                  
                  
                  31,0412nd
      Qtr 2009
                  
                  
                  11,265
                  
                  
                  
                  9,195
                  
                  
                  
                  4,976
                  
                  
                  
                  15,815





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





2nd
      Qtr 2009
                
                
                1st
      Qtr
                  2009
                
                
                4th
      Qtr 2008
                
                
                3rd
      Qtr 2008
                
                
                2nd
      Qtr 2008Net
      interest income
                
                $
                1.24
                
                
                $
                1.31
                
                
                $
                1.41
                
                
                $
                1.43
                
                
                $
                1.45Loan
      loss expense
                
                
                1.01
                
                
                
                2.19
                
                
                
                1.18
                
                
                
                .24
                
                
                
                .67Noninterest
      income
                
                
                .55
                
                
                
                .57
                
                
                
                .53
                
                
                
                .61
                
                
                
                .58Noninterest
      expense
                
                
                1.74
                
                
                
                3.42
                
                
                
                1.57
                
                
                
                1.46
                
                
                
                1.49Net
      income (loss) before taxes
                
                $
                (.96
                )
                
                $
                (3.73
                )
                
                $
                (.81
                )
                
                $
                .34
                
                
                $
                (.13
                )




33


FIRST M
& F CORPORATION





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





2nd
      Qtr 2009
                
                
                1st
      Qtr 2009
                
                
                4th Qtr
      2008
                
                
                3rd Qtr
      2008
                
                
                2nd
      Qtr 2008Net
      interest margin
                
                
                3.16
                %
                
                
                3.33
                %
                
                
                3.60
                %
                
                
                3.70
                %
                
                
                3.73
                %Efficiency
      ratio
                
                
                95.10
                
                
                
                80.41
                
                
                
                79.29
                
                
                
                69.93
                
                
                
                71.85Return
      on assets
                
                
                (1.27
                )
                
                
                (6.71
                )
                
                
                (1.08
                )
                
                
                .55
                
                
                
                (.12
                )Return
      on  total equity
                
                
                (14.84
                )
                
                
                (73.59
                )
                
                
                (12.27
                )
                
                
                6.27
                
                
                
                (1.30
                )Return
      on common equity
                
                
                (20.40
                )
                
                
                (81.82
                )
                
                
                (12.27
                )
                
                
                6.27
                
                
                
                (1.30
                )Noninterest
      income to avg. assets
                
                
                1.24
                
                
                
                1.28
                
                
                
                1.19
                
                
                
                1.37
                
                
                
                1.31Noninterest
      income to revenues (1)
                
                
                29.92
                
                
                
                29.81
                
                
                
                26.90
                
                
                
                29.16
                
                
                
                28.13Noninterest
      expense to avg assets
                
                
                3.94
                
                
                
                7.65
                
                
                
                3.52
                
                
                
                3.29
                
                
                
                3.34Salaries
      and benefits to total noninterest expense
                
                
                46.15
                
                
                
                23.07
                
                
                
                47.47
                
                
                
                54.66
                
                
                
                54.28Contribution
      margin (2)
                
                
                56.11
                
                
                
                58.85
                
                
                
                62.36
                
                
                
                61.78
                
                
                
                61.00Nonaccrual
      loans to loans
                
                
                6.69
                
                
                
                4.51
                
                
                
                1.74
                
                
                
                1.82
                
                
                
                .9490
      day past due loans to loans
                
                
                .50
                
                
                
                .12
                
                
                
                .48
                
                
                
                .05
                
                
                
                .33Annualized
      net charge offs as a percent of average loans
                
                
                6.87
                
                
                
                1.13
                
                
                
                1.79
                
                
                
                .49
                
                
                
                .46


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


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





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





(Dollars in
      thousands)
                
                2nd
      Qtr 2009
                
                
                1st
      Qtr 2009
                
                
                4th
      Qtr 2008
                
                
                3rd
      Qtr 2008
                
                
                2nd
      Qtr 2008Mortgage
      originations
                
                $
                32,438
                
                
                $
                23,992
                
                
                $
                14,379
                
                
                $
                12,926
                
                
                $
                17,443Commissions
      from annuity sales
                
                
                1
                
                
                
                9
                
                
                
                11
                
                
                
                18
                
                
                
                49Trust
      revenues
                
                
                51
                
                
                
                57
                
                
                
                56
                
                
                
                56
                
                
                
                86Retail
      investment revenues
                
                
                85
                
                
                
                59
                
                
                
                75
                
                
                
                61
                
                
                
                112Revenues
      per FTE employee
                
                
                31
                
                
                
                32
                
                
                
                33
                
                
                
                34
                
                
                
                33Agency
      commissions per agency FTE employee (1)
                
                
                25
                
                
                
                25
                
                
                
                23
                
                
                
                29
                
                
                
                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:





2nd
      Qtr 2009
                
                
                1st
      Qtr 2009
                
                
                4th
      Qtr 2008
                
                
                3rd
      Qtr 2008
                
                
                2nd
      Qtr 2008Full-time
      equivalent employees
                
                
                529
                
                
                
                535
                
                
                
                543
                
                
                
                548
                
                
                
                556Number
      of noninterest-bearing deposit accounts
                
                
                34,116
                
                
                
                34,509
                
                
                
                35,112
                
                
                
                35,907
                
                
                
                36,455




34


FIRST M
& F CORPORATION





Net
Interest Income





Net
interest income before loan loss expenses for the first six months of 2009 was
$23.109 million as compared to $26.227 million for the first six months of 2008.
For the first six months of 2009 compared to 2008: earning asset yields
decreased by 130 basis points, liability costs decreased by 93 basis points, the
net interest spread decreased by 38 basis points and the net interest margin
decreased by 44 basis points.





Net
interest income before loan loss expenses for the second quarter of 2009 was
$11.265 million as compared to $13.100 million for the second quarter of 2008
and $11.844 million for the first quarter of 2009. For the second quarter of
2009 compared to the same quarter of 2008: earning asset yields decreased by 128
basis points, liability costs decreased by 76 basis points, the net interest
spread decreased by 52 basis points and the net interest margin decreased by 57
basis points. For the second quarter of 2009 compared to the first quarter of
2009: earning asset yields decreased by 33 basis points, liability costs
decreased by 14 basis points, the net interest spread decreased by 19 basis
points and the net interest margin decreased by 17 basis points.





Balance
sheet dynamics affecting the comparative net interest margins for the first six
months of 2009 compared to 2008 include (1) a decrease of 4.59% in average loans
held for investment, (2) a decrease in average loans as a percentage of earning
assets from 82.03% in the first six months of 2008 to 77.45% in the first six
months of 2009, (3) an increase in average interest-bearing deposits of 1.37%,
(4) a decrease in average other borrowings of 10.57% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.03%
in 2008 to 11.21% in 2009.





Balance
sheet dynamics affecting the comparative net interest margins for the second
quarter of 2009 compared to 2008 include (1) a decrease of 5.22% in average
loans held for investment, (2) a decrease in average loans as a percentage of
earning assets from 82.16% in the second quarter of 2008 to 76.51% in the second
quarter of 2009, (3) an increase in average interest-bearing deposits of 1.91%,
(4) a decrease in average other borrowings of 8.48% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.17%
in 2008 to 11.46% in 2009.





Balance
sheet dynamics affecting the comparative net interest margins for the second
quarter of 2009 compared to the first quarter of 2009 include (1) a decrease of
2.89% 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 76.51%
in the second quarter of 2009, (3) a decrease in average interest-bearing
deposits of .52%, (4) a decrease in average other borrowings of 10.83% and (5)
an increase in average noninterest-bearing deposits as a percentage of total
assets from 10.95% in the first quarter of 2009 to 11.46% in the second quarter
of 2009.





Yield and
cost dynamics affecting the comparative net interest margins for the first six
months of 2009 compared to 2008 include (1) a decrease of 124 basis points in
yields on loans held for investment and for sale, (2) a decrease of 112 basis
points in investment and short-term funds yields, (3) a decrease of 100 basis
points in costs of deposits and (4) a decrease of 27 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the second
quarter of 2009 compared to 2008 include (1) a decrease of 115 basis points in
yields on loans held for investment and for sale, (2) a decrease of 245 basis
points in investment and short-term funds yields, (3) a decrease of 80 basis
points in costs of deposits and (4) a decrease of 26 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the second
quarter of 2009 compared to the first quarter of 2009 include (1) a decrease of
31 basis points in yields on loans held for investment and for sale, (2) a
decrease of 25 basis points in investment and short-term funds yields, (3) a
decrease of 11 basis points in costs of deposits and (4) a decrease of 10 basis
points in costs of borrowings.


35


FIRST M
& F CORPORATION





The
decrease in asset yields for the second quarter and first half of 2009 as
compared to the same periods in 2008 can be attributed to (1) a decrease in the
prime lending rate of 400 basis points during 2008, (2) a steady decrease in
short-term Treasury rates from 3.07% in December 2007 to 1.89% in June 2008 to
..03% in December 2008 and to .18% in June 2009 and (3) a decrease in loan
activity through the second half of 2008 and into 2009. Average loans held to
maturity were $1.213 billion during the first quarter of 2008 and $1.194 billion
during the second quarter of 2008. Continuing the downtrend, average loans held
to maturity decreased from $1.165 billion during the first quarter of 2009 to
$1.131 billion during the second quarter of 2009 as the economy weakened and new
lending opportunities became scarce. Yields on loans held to maturity followed
the prime rate trend, decreasing from 6.86% for the second quarter of 2008 and
7.11% for the first half of 2008 to 5.72% for the second quarter of 2009 and
5.88% for the first half of 2009. In addition to the decrease in yields due to
the rate environment, the volume of nonaccrual loans increased significantly
from June 2008 through the end of 2008 and into 2009. Total nonaccrual loans at
June 30, 2009 were $74.420 million, representing 6.72% of the loan portfolio. In
contrast, total nonaccrual loans at June 30, 2008 were $11.317 million, or .95%
of the loan portfolio. The Company also reversed $83 thousand in investment
interest income representing the interest that had been accrued on two
investments since the last interest payment received in 2008 related to two
collateralized debt obligations that were placed in nonaccrual status during the
second quarter of 2009. The investments had a combined par value of $1.751
million with a fair value of $1.047 million. Subsequently, one of the
investments was reduced by a credit-related other-than-temporary impairment
charge of $175 thousand. Deposit costs decreased to 2.19% for the second quarter
of 2009 and 2.25% for the first half of 2009 from 2.99% for the second quarter
of 2008 and 3.25% for the first half of 2008. For the second quarter of 2009
average interest-bearing checking accounts increased by 31.19% over the fourth
quarter of 2008 and by 32.78% over the second quarter of 2008. Approximately
half of this growth occurred through core customer growth in the Summit checking
product while approximately half was provided through public funds acquired
through a rate bidding process. Average certificates of deposit for the second
quarter of 2009 decreased by 2.84% from the fourth quarter of 2008 and by 5.27%
from the second quarter of 2008. During the first half of 2009, core customer
certificate of deposit balances increased by $38.950 million while rate-bid
public certificates decreased by $37.615 million.





Net
interest margins should be affected during the remainder of 2009 by the shape of
the yield curve, credit spreads that are being priced into the corporate
markets, a lack of demand for commercial and consumer credit and the trend in
nonaccrual loan balances. The yield curve spread between the 3-month and 5-year
Treasuries was 42 basis points during December 2007 and 160 basis points during
June 2008. However, the 3-month to 5-year Treasury spread moved between 120 and
210 basis points throughout the last nine months of 2008, settling at 149 basis
points in December. The spread between short-term and long-term rates increased
significantly during the second quarter of 2009 as the longer end of the yield
curve began to rise. The 3-month to 5-year Treasury yield spread was 253 basis
points in June 2009. Short-term rates drifted lower during the second quarter of
2009 while long-term rates began to move upward. The economy has continued to
weaken since 2007 with a considerable slowing in the housing and construction
sectors. The Federal Reserve Board has responded by providing liquidity
facilities to the commercial and investment banking sectors as well as through
discount rate reductions. The Federal Open Market Committee decreased its Fed
funds target rate from 4.25% at the end of 2007 to a range of 0% to .25% at the
end of 2008 and is expected to keep its target rates low until an economic
recovery is evident. Federal legislation was passed in 2008 in the form of the
Emergency Economic Stabilization Act, which authorized the U. S. Treasury to
implement the Troubled Asset Relief Program (TARP) in an effort to remove
investments that had significant market losses and provide liquidity in their
place. The Company received $30.000 million in funding from the TARP’s Capital
Purchase Program in February 2009. This liquidity should help the Company in
funding asset growth and in displacing high-cost sources of funds.





Management
expects loan yields to continue to decrease over the course of 2009. Management
expects deposit costs to continue to decrease as certificates of deposit mature
and reprice in the current lower rate environment or are displaced by other
competitive interest-bearing checking and money-market accounts. Management
reduced the pricing on certain interest-bearing checking account products during
the second quarter of 2009 as market rates decreased with the trend in
short-term rates. These rate reductions should contribute to a lower cost of
deposits going forward. While certificates of deposit are not being aggressively
marketed, the focus for 2009 and beyond has been and will continue to be the
accumulation of core deposits and the building of customer relationships that
accompany those deposits. The base product for this effort during 2008 and into
2009 has been the Summit interest-bearing checking account. Balances in this
product have grown from $51.265 million at June 30, 2008 to $80.998 million at
June 30, 2009.


36


FIRST M
& F CORPORATION





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





Yields/Costs
                
                
                Yields/Costs2nd
      Quarter, 2009
                
                
                1st
      Quarter, 2009
                
                
                2nd
      Quarter, 2008
                
                
                1st
      Quarter, 2008Interest
      bearing bank balances
                
                
                0.06
                %
                
                
                0.16
                %
                
                
                1.96
                %
                
                
                3.15
                %Federal
      funds sold
                
                
                0.23
                
                
                
                0.22
                
                
                
                2.72
                
                
                
                3.40Taxable
      investments
                
                
                4.00
                
                
                
                4.92
                
                
                
                5.18
                
                
                
                5.03Tax-exempt
      investments
                
                
                6.01
                
                
                
                6.07
                
                
                
                6.21
                
                
                
                6.24Loans
      held for sale
                
                
                2.13
                
                
                
                3.56
                
                
                
                5.29
                
                
                
                5.52Loans
      held for investment
                
                
                5.72
                
                
                
                6.03
                
                
                
                6.86
                
                
                
                7.36Earning
      asset yield
                
                
                5.30
                
                
                
                5.63
                
                
                
                6.58
                
                
                
                6.96Interest
      checking
                
                
                1.42
                
                
                
                1.37
                
                
                
                1.49
                
                
                
                1.46Money
      market deposits
                
                
                1.33
                
                
                
                1.70
                
                
                
                2.33
                
                
                
                2.74Savings
                
                
                1.51
                
                
                
                1.65
                
                
                
                2.32
                
                
                
                2.76Certificates
      of deposit
                
                
                2.99
                
                
                
                3.04
                
                
                
                3.87
                
                
                
                4.49Short-term
      borrowings
                
                
                1.08
                
                
                
                1.31
                
                
                
                2.29
                
                
                
                3.30Other
      borrowings
                
                
                4.51
                
                
                
                4.60
                
                
                
                4.82
                
                
                
                4.75Cost
      of interest-bearing liabilities
                
                
                2.46
                
                
                
                2.60
                
                
                
                3.22
                
                
                
                3.69Net
      interest spread
                
                
                2.84
                
                
                
                3.03
                
                
                
                3.36
                
                
                
                3.27Effect
      of non-interest bearing deposits
                
                
                .31
                
                
                
                .31
                
                
                
                .40
                
                
                
                .44Effect
      of leverage
                
                
                .01
                
                
                
                (.01
                )
                
                
                (.03
                )
                
                
                (.05
                )Net
      interest margin, tax-equivalent
                
                
                3.16
                
                
                
                3.33
                
                
                
                3.73
                
                
                
                3.66Less:
      Tax equivalent adjustments:Investments
                
                
                .09
                
                
                
                .09
                
                
                
                .09
                
                
                
                .09Loans
                
                
                .01
                
                
                
                .01
                
                
                
                .01
                
                
                
                .01Reported
      book net interest margin
                
                
                3.06
                %
                
                
                3.23
                %
                
                
                3.63
                %
                
                
                3.56
                %





The
following table shows the components of the net interest margin for the first
six months of 2009 and 2008:





Yields/CostsJune
      2009
                  
                  
                  June
      2008Interest
      bearing bank balances
                  
                  
                  0.12
                  %
                  
                  
                  2.72
                  %Federal
      funds sold
                  
                  
                  0.23
                  
                  
                  
                  3.13Taxable
      investments
                  
                  
                  4.40
                  
                  
                  
                  5.11Tax-exempt
      investments
                  
                  
                  6.04
                  
                  
                  
                  6.22Loans
      held for sale
                  
                  
                  2.93
                  
                  
                  
                  5.40Loans
      held for investment
                  
                  
                  5.88
                  
                  
                  
                  7.11Earning
      asset yield
                  
                  
                  5.46
                  
                  
                  
                  6.77Interest
      checking
                  
                  
                  1.40
                  
                  
                  
                  1.48Money
      market deposits
                  
                  
                  1.52
                  
                  
                  
                  2.52Savings
                  
                  
                  1.58
                  
                  
                  
                  2.54Certificates
      of deposit
                  
                  
                  3.02
                  
                  
                  
                  4.19Short-term
      borrowings
                  
                  
                  1.20
                  
                  
                  
                  2.59Other
      borrowings
                  
                  
                  4.56
                  
                  
                  
                  4.78Cost
      of interest-bearing liabilities
                  
                  
                  2.53
                  
                  
                  
                  3.46Net
      interest spread
                  
                  
                  2.93
                  
                  
                  
                  3.31Effect
      of non-interest bearing deposits
                  
                  
                  .31
                  
                  
                  
                  .42Effect
      of leverage
                  
                  
                  .01
                  
                  
                  
                  (.04
                  )Net
      interest margin, tax-equivalent
                  
                  
                  3.25
                  
                  
                  
                  3.69Less:
      Tax equivalent adjustments:Investments
                  
                  
                  .10
                  
                  
                  
                  .08Loans
                  
                  
                  .01
                  
                  
                  
                  .01Reported
      book net interest margin
                  
                  
                  3.14
                  %
                  
                  
                  3.60
                  %




37


FIRST M
& F CORPORATION





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





(Dollars
      in thousands)2nd
      Quarter, 2009
                
                
                1st
      Quarter, 2009
                
                
                2nd
      Quarter, 2008
                
                
                1st
      Quarter, 2008Interest
      bearing bank balances
                
                $
                9,339
                
                
                $
                16,195
                
                
                $
                5,627
                
                
                $
                9,893Federal
      funds sold
                
                
                23,959
                
                
                
                44,819
                
                
                
                6,783
                
                
                
                10,463Taxable
      investments
                
                
                250,023
                
                
                
                191,111
                
                
                
                182,982
                
                
                
                188,424Tax-exempt
      investments
                
                
                57,091
                
                
                
                59,875
                
                
                
                56,376
                
                
                
                52,139Loans
      held for sale
                
                
                7,036
                
                
                
                8,987
                
                
                
                7,406
                
                
                
                7,104Loans
      held for investment
                
                
                1,131,370
                
                
                
                1,165,086
                
                
                
                1,193,703
                
                
                
                1,213,121Earning
      assets
                
                
                1,478,818
                
                
                
                1,486,073
                
                
                
                1,452,877
                
                
                
                1,481,144Other
      assets
                
                
                132,695
                
                
                
                159,482
                
                
                
                168,688
                
                
                
                173,807Total
      assets
                
                $
                1,611,513
                
                
                $
                1,645,555
                
                
                $
                1,621,565
                
                
                $
                1,654,951Interest
      checking
                
                
                280,952
                
                
                
                263,716
                
                
                
                211,590
                
                
                
                202,638Money
      market deposits
                
                
                172,014
                
                
                
                172,747
                
                
                
                186,740
                
                
                
                165,706Savings
      deposits
                
                
                113,799
                
                
                
                114,655
                
                
                
                116,720
                
                
                
                111,973Certificates
      of deposit
                
                
                552,134
                
                
                
                573,580
                
                
                
                582,841
                
                
                
                634,966Short-term
      borrowings
                
                
                9,013
                
                
                
                10,163
                
                
                
                17,693
                
                
                
                7,319Other
      borrowings
                
                
                157,054
                
                
                
                176,133
                
                
                
                171,600
                
                
                
                200,849Interest-bearing
      liabilities
                
                
                1,284,966
                
                
                
                1,310,994
                
                
                
                1,287,184
                
                
                
                1,323,451Noninterest-bearing
      deposits
                
                
                184,716
                
                
                
                180,207
                
                
                
                181,134
                
                
                
                180,161Other
      liabilities
                
                
                3,711
                
                
                
                4,226
                
                
                
                9,179
                
                
                
                8,950Stockholders’
      equity
                
                
                138,120
                
                
                
                150,128
                
                
                
                144,068
                
                
                
                142,389Liabilities
      and stockholders’ equity
                
                $
                1,611,513
                
                
                $
                1,645,555
                
                
                $
                1,621,565
                
                
                $
                1,654,951Loans
      to earning assets
                
                
                76.51
                %
                
                
                78.40
                %
                
                
                82.16
                %
                
                
                81.90
                %Loans
      to assets
                
                
                70.80
                %
                
                
                70.80
                %
                
                
                73.61
                %
                
                
                73.30
                %Earning
      assets to assets
                
                
                91.77
                %
                
                
                90.31
                %
                
                
                89.60
                %
                
                
                89.50
                %Noninterest-bearing
      deposits to assets
                
                
                11.46
                %
                
                
                10.95
                %
                
                
                11.17
                %
                
                
                10.89
                %Equity
      to assets
                
                
                8.57
                %
                
                
                9.12
                %
                
                
                8.88
                %
                
                
                8.60
                %





The
following table shows average balance sheets for the first six months of 2009
and 2008:





(Dollars
      in thousands)June
      2009
                  
                  
                  June
      2008Interest
      bearing bank balances
                  
                  $
                  12,748
                  
                  
                  $
                  7,760Federal
      funds sold
                  
                  
                  34,331
                  
                  
                  
                  8,624Taxable
      investments
                  
                  
                  220,730
                  
                  
                  
                  185,703Tax-exempt
      investments
                  
                  
                  58,476
                  
                  
                  
                  54,257Loans
      held for sale
                  
                  
                  8,006
                  
                  
                  
                  7,255Loans
      held for investment
                  
                  
                  1,148,135
                  
                  
                  
                  1,203,412Earning
      assets
                  
                  
                  1,482,426
                  
                  
                  
                  1,467,011Other
      assets
                  
                  
                  146,014
                  
                  
                  
                  171,247Total
      assets
                  
                  $
                  1,628,440
                  
                  
                  $
                  1,638,258Interest
      checking
                  
                  
                  272,382
                  
                  
                  
                  207,114Money
      market deposits
                  
                  
                  172,378
                  
                  
                  
                  176,223Savings
      deposits
                  
                  
                  114,225
                  
                  
                  
                  114,346Certificates
      of deposit
                  
                  
                  562,798
                  
                  
                  
                  608,903Short-term
      borrowings
                  
                  
                  9,585
                  
                  
                  
                  12,506Other
      borrowings
                  
                  
                  166,540
                  
                  
                  
                  186,225Interest-bearing
      liabilities
                  
                  
                  1,297,908
                  
                  
                  
                  1,305,317Noninterest-bearing
      deposits
                  
                  
                  182,474
                  
                  
                  
                  180,647Other
      liabilities
                  
                  
                  3,967
                  
                  
                  
                  9,065Stockholders’
      equity
                  
                  
                  144,091
                  
                  
                  
                  143,229Liabilities
      and stockholders’ equity
                  
                  $
                  1,628,440
                  
                  
                  $
                  1,638,258Loans
      to earning assets
                  
                  
                  77.45
                  %
                  
                  
                  82.03
                  %Loans
      to assets
                  
                  
                  70.51
                  %
                  
                  
                  73.46
                  %Earning
      assets to assets
                  
                  
                  91.03
                  %
                  
                  
                  89.55
                  %Noninterest-bearing
      deposits to assets
                  
                  
                  11.21
                  %
                  
                  
                  11.03
                  %Equity
      to assets
                  
                  
                  8.85
                  %
                  
                  
                  8.74
                  %


38





FIRST M
& F CORPORATION





Provision
for Loan Losses





The
accrual for the provision for loan losses for the first half of 2009 was $29.035
million as compared to $6.860 million for the first half of 2008. Net charge
offs were $22.630 million for the first half of 2009 as compared to $2.176
million for the first half of 2008.





The
accrual for the provision for loan losses for the second quarter of 2009 was
$9.195 million as compared to $6.080 million for the second quarter of 2008. Net
charge-offs were $19.378 million for the second quarter of 2009 as compared to
$1.375 million for the second quarter of 2008. The allowance for loan losses as
a percentage of loans was 2.83% at June 30, 2009, 2.12% at December 31, 2008,
and 1.61% at June 30, 2008.





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





Non
Interest Income





Noninterest
income, excluding securities transactions, for the first half of 2009 was
$10.338 million as compared to $10.760 million for the same period in 2008. For
the first half of 2009 as compared to 2008: (1) deposit revenues decreased by
$389 thousand, (2) mortgage banking revenues increased by $335 thousand and (3)
agency commissions decreased by $110 thousand.





Noninterest
income, excluding securities transactions, for the second quarter of 2009 was
$5.150 million as compared to $5.259 million for the same period in 2008 and
$5.188 million in the first quarter of 2009. For the second quarter of 2009 as
compared to the second quarter of 2008: (1) deposit revenues decreased by $118
thousand, (2) mortgage banking revenues increased by $360 thousand and (3)
agency commissions decreased by $80 thousand. For the second quarter of 2009 as
compared to the first quarter of 2009: (1) deposit revenues increased by $290
thousand, (2) mortgage banking revenues increased by $224 thousand and (3)
agency commissions decreased by $14 thousand.





The
second quarter of 2009 showed a decrease of 4.03% from the second quarter of
2008 and an 11.50% increase from the first quarter of 2009 in deposit revenues.
Overdraft fee revenues, which comprise approximately 70% of deposit revenues,
decreased by 12.12% from the second quarter of 2008 to the second quarter of
2009 and increased by 9.87% from the first quarter of 2009 to the second quarter
of 2009. The decline in the second quarter of 2009 from the second quarter of
2008 was due to decreased item volumes as second quarter 2009 volumes were lower
than second quarter 2008 volumes by 12.12%. The increase in the second quarter
of 2009 from the first quarter of 2009 was due to increased item volumes as
second quarter 2009 volumes were higher than first quarter 2009 volumes by
9.87%. Overdraft fees are per item charges applied to each check paid on an
overdrawn account or returned. The per item fee is determined by the Company’s
pricing committee and is based primarily on the competitive market prices as
well as on costs associated with processing the items. The majority of the
volumes of overdraft items processed comes from customers in the Company’s
overdraft protection program which grants overdraft limits to customers,
generally allows account activity up to the overdraft limit balance, and
requires that accounts have positive balances at some point within a thirty day
period. Overdrafts are considered loans for accounting purposes and therefore
are subject to the Company’s loan accounting policies concerning the charging
off of accounts to the allowance for loan losses. Interest charged on overdrawn
balances, based on the Federal discount rate, is recorded as interest on loans.
The overdraft protection program is designed to help customers with their cash
flow needs and is not extended to individuals who are poor credit risks. Debit
card revenues increased by 45.13% from the second quarter of 2008 to the second
quarter of 2009 and increased by 41.60% from the first quarter of 2009 to the
second quarter of 2009. The Company changed debit card processing networks
during the second quarter of 2009 and concurrently changed from collecting
income on a monthly basis to a daily basis. This change resulted in an
additional month of revenue of approximately $180 thousand, the last monthly
payment by the prior processor, to be credited to debit card revenues during the
second quarter of 2009.




39





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 2009.  The following table
shows the components of service charges on deposit accounts:





Three
      Months Ended
                
                
                Six
      Months Ended(Dollars
      in thousands)
                
                June
      30
                
                
                June
      302009
                
                
                2008
                
                
                2009
                
                
                2008Service
      charge revenues
                
                $
                227
                
                
                $
                356
                
                
                $
                563
                
                
                $
                712Debit/ATM
      card revenues
                
                
                820
                
                
                
                565
                
                
                
                1,399
                
                
                
                1,081Overdraft
      fee revenues
                
                
                1,765
                
                
                
                2,009
                
                
                
                3,372
                
                
                
                3,930Service
      charges on deposit accounts
                
                $
                2,812
                
                
                $
                2,930
                
                
                $
                5,334
                
                
                $
                5,723





Mortgage
banking income increased by 155.17% from the second quarter of 2008 to the
second quarter of 2009 and increased by 60.87% from the first quarter of 2009 to
the second quarter of 2009. Mortgage originations increased by 85.97% from the
second quarter of 2008 to the second quarter of 2009 and increased by 35.20%
from the first quarter of 2009 to the second quarter of 2009. For 2008 mortgage
rates hit their peak in July at 6.63%. Mortgage rates decreased steadily from
the end of October 2008 through the first quarter of 2009 and into May 2009
before moving up to their highs of 2009 in June. The lower rate environment
resulted in a significant increase in mortgage refinancings during the first
quarter of 2009 as compared to the fourth quarter of 2008 and in the second
quarter of 2009 as compared to the first quarter of 2009. If the Federal Reserve
continues its efforts to purchase mortgage-backed securities then mortgage rates
should remain low. However, the housing market will need to recover with new and
existing home sales returning to normal levels for mortgage revenues to
experience sustained growth, as refinancings have outpaced purchase originations
by a 3-to-1 ratio so far in 2009.





Agency
commission income decreased by 7.71% from the second quarter of 2008 to the
second quarter of 2009 and decreased by 1.44% from the first quarter of 2009 to
the second quarter of 2009. For the second quarter of 2009 as compared to the
second quarter of 2008, property & casualty commissions decreased by 1.75%
while annuity insurance commissions decreased by 97.86% and title insurance
commissions decreased by 75.22%. 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 have
deferred their interest payments and were placed in nonaccrual status during the
second quarter of 2009. One of the beneficial interests failed an impairment
test at June 30, 2009 due primarily to collateral defaults and the subordinate
position of the interest as compared to other senior securities in the CDO.
Management determined that the credit-related portion of the impairment was $175
thousand with the remaining impairment being $218 thousand. The credit portion
of the impairment was classified as an other-than-temporary impairment and
charged against earnings during the second quarter of 2009 while the remaining
$218 other-than-temporary impairment was charged to other comprehensive income
on the statement of condition.





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





(Dollars
      in thousands)
                
                
                2Q2009
                
                
                
                1Q2009
                
                
                
                2Q2008
                
                
                
                1Q2008Agency
      profit-sharing revenues
                
                $
                8
                
                
                $
                425
                
                
                $
                6
                
                
                $
                368Loan
      fees
                
                
                111
                
                
                
                110
                
                
                
                113
                
                
                
                129Gains
      on student loan sales
                
                
                32
                
                
                
                73
                
                
                
                88
                
                
                
                29Gain
      on sale of insurance agency office
                
                
                -
                
                
                
                50
                
                
                
                -
                
                
                
                -Loss
      on bankers bank stock
                
                
                (78
                )
                
                
                -
                
                
                
                -
                
                
                
                -All
      other income
                
                
                333
                
                
                
                436
                
                
                
                458
                
                
                
                499Total
      other income
                
                $
                406
                
                
                $
                1,094
                
                
                $
                665
                
                
                $
                1,025





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 bankers bank loss was the entire write-off of the balance of an
investment in the stock of Silverton Bank, N.A. in Atlanta, Georgia, which was
closed by banking regulators on May 1, 2009. The gain on the sale of insurance
business was the premium received in February 2009 in the sale of the book of
business in the Olive Branch office of M&F Insurance Group,
Inc.


40





FIRST M
& F CORPORATION





The
Company has a strategy to increase noninterest revenues as a proportion of total
revenues over time. Noninterest revenues as a percentage of total revenues
increased from 28.13% in the second quarter of 2008 to 29.92% in the second
quarter of 2009, and increased from 29.81% in the first quarter of 2009 to
29.92% in the second quarter of 2009. Another metric that the Company monitors
is revenues per full-time employee, which were approximately $31 thousand per
employee for the second quarter of 2009 and $32 thousand per employee for the
first quarter of 2009 as compared to $33 thousand for the second quarter of 2008
and $34 thousand for the first quarter of 2008. Insurance product revenues per
producer remained fairly constant from $25 thousand per producer in the second
and first quarters of 2008 to $25 thousand per producer in the second and first
quarters 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.





Non
Interest Expense





Noninterest
expenses increased by 17.50% from the second quarter of 2008 to the second
quarter of 2009 and decreased by 49.05% from the first quarter of 2009 to the
second quarter of 2009. Excluding goodwill and other intangible asset impairment
charges of $17.048 million in the first quarter of 2009, noninterest expenses
increased by 13.02% from the first quarter of 2009 to the second quarter of
2009.





Salary
and benefit expenses, which comprise approximately 46% of noninterest expenses,
decreased by .12% from the second quarter of 2008 to the second quarter of 2009
and increased by 1.90% from the first quarter of 2009 to the second quarter of
2009. The increase in salaries and benefits from the first quarter to the second
quarter in 2009 was due to one additional day of wages in the second quarter of
approximately $58 thousand and a $52 thousand accrual reduction during the first
quarter of expenses related to forfeiture estimates for restricted stock grants.
The number of full-time equivalent employees was 529 at June 30, 2009, 535 at
March 31, 2009, 556 at June 30, 2008, and 565 at March 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.





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





(Dollars
      in thousands)
                
                
                2Q2009
                
                
                
                1Q2009
                
                
                
                2Q2008
                
                
                
                1Q2008Losses
      on sales of other real estate
                
                $
                428
                
                
                $
                530
                
                
                $
                119
                
                
                $
                -Write-downs
      of other real estate
                
                
                893
                
                
                
                -
                
                
                
                334
                
                
                
                -Other
      real estate expenses
                
                
                217
                
                
                
                228
                
                
                
                79
                
                
                
                91Rental
      income on other real estate properties
                
                
                (12
                )
                
                
                (2
                )
                
                
                (5
                )
                
                
                (2
                )Total
      foreclosed property expenses
                
                $
                1,526
                
                
                $
                756
                
                
                $
                527
                
                
                $
                89





FDIC
insurance assessments in 2009 increased significantly over the second quarter
and first half of 2008 as (1) assessment rates for the first quarter of 2009
were increased by 7 basis points by the FDIC over the 2008 assessment rates, (2)
credits used to reduce assessments paid were fully used up by the third quarter
of 2008, (3) amounts paid due to the special assessment for insured deposits in
excess of $250,000 in the Temporary Liquidity Guarantee Program and (4) a
special banking industry assessment of 5 basis points on total bank assets less
Tier 1 risk-based capital accrued during the second quarter of 2009. The special
assessment accrued during the second quarter of 2009 was $749 thousand.
Noninterest expenses as a percent of average assets increased from 3.34% in the
second quarter of 2008 to 3.94% in the second quarter of 2009, and decreased
from 7.65% in the first quarter of 2009 to 3.94% in the second quarter of 2009.
Excluding one-time goodwill and intangible asset impairment charges of $17.048
million, noninterest expenses as a percent of average assets for the first
quarter of 2009 were 3.45%.





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





(Dollars
      in thousands)
                
                
                2Q2009
                
                
                
                1Q2009
                
                
                
                2Q2008
                
                
                
                1Q2008Postage
      and shipping
                
                $
                223
                
                
                $
                243
                
                
                $
                228
                
                
                $
                234Supplies
                
                
                198
                
                
                
                227
                
                
                
                194
                
                
                
                259Legal
      expenses
                
                
                288
                
                
                
                137
                
                
                
                197
                
                
                
                165Other
      professional expenses
                
                
                174
                
                
                
                126
                
                
                
                180
                
                
                
                194Insurance
      expenses
                
                
                82
                
                
                
                223
                
                
                
                110
                
                
                
                237Debit
      card processing expenses
                
                
                146
                
                
                
                182
                
                
                
                178
                
                
                
                160All
      other expenses
                
                
                1,565
                
                
                
                1,320
                
                
                
                1,219
                
                
                
                1,301Total
      other expense
                
                $
                2,676
                
                
                $
                2,458
                
                
                $
                2,306
                
                
                $
                2,550


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.
An additional impairment test was performed at the end of November 2008 due to
the considerable credit problems encountered and because the stock price had
decreased by 47.34%. The tested community banking unit, with lower
intermediate-term cash flow projections than it had one year ago, did have a
calculated fair value that was less than its book value. The fair value
calculation was based on a discounted cash flow analysis that assumed continued
credit loss expectations through 2009, a projection of noninterest revenues and
expenses based on historical growth and future market expectations and a
projection of net interest income starting at the current margins with
expectations for future decreases in the margins and increases in loan volumes.
A minimum tangible capital ratio was required to be maintained as well. A
terminal value was determined using a standard multiple of earnings and a market
discount rate was applied to the series of cash flows to arrive at a fair value.
The book value in excess of fair value required a second step to be performed in
the impairment analysis. The second step of the goodwill calculation was
performed to assign fair values to the identifiable assets and liabilities of
the community banking unit to determine if the goodwill asset, which would be a
residual, was worth at least as much as its carrying value. In the marking of
community banking assets to market for the impairment test, the loan portfolio
absorbed the majority of the valuation decreases from a year ago. The loan
portfolio had suffered from credit deterioration during 2008 and observations of
the Company’s current markets indicated that more deterioration could be
expected. The loan portfolio was valued using assumptions concerning the
recoverability of the nonaccrual loans that were currently identified. The
remaining unadjusted loan portfolio cash flows were discounted using credit
spreads observable in the corporate bond market. This analysis resulted in a
much lower fair value being assigned to the loan portfolio than its carrying
value. Management concluded that the community banking unit’s impairment was
primarily due to impairment in the loan portfolio and not in the goodwill asset.
Therefore, no goodwill impairment was recorded when the fair value of the
community banking unit was allocated to all assets and liabilities, leaving the
original community banking unit goodwill intact. As a result, no goodwill
impairment was recognized from the November test.





In the
fourth quarter of 2008 loan loss accruals of $10.684 million were recorded for
loan impairments, confirming the decrease in net realizable loans that was
implied in the November goodwill impairment testing. The Company performed a
subsequent goodwill impairment test as of December 31, 2008 with no goodwill
impairment indicated. The fair value of the community banking unit was valued
using a discounted cash flow analysis. Earnings were expected to be positive for
2009, with approximately $12.000 million in loan losses, and subsequently
returning to normal over time and achieving a 1.00% return on assets in the
fourth year of the five-year projection. Low loan growth was expected with no
improvement in the net interest margins. The same discount rate and multiple of
earnings terminal value were used from the November test. Even though the first
step test of the community banking unit resulted in an estimated fair value in
excess of its carrying value, a valuation of the loan portfolio was performed to
determine if there was still a significant difference between its fair value and
book value. This valuation confirmed that the loan portfolio had a fair value of
approximately $65 million less than its gross (before being reduced by the
allowance for loan losses) balance as disclosed in Note 20 concerning fair
value, in the Company’s December 31, 2008 financial statements. Therefore, if
the fair value of the community banking unit had been less than its book value,
the impairment would have been primarily in the loan portfolio and not in the
goodwill asset.


42





FIRST M
& F CORPORATION





The
Company evaluated its goodwill asset as of March 31, 2009 after the stock price
continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share
at March 31, 2009 and as the Company continued to accrue for sizeable losses in
the real estate construction loan portfolio, resulting in unexpected first
quarter net losses. The Company determined that another impairment test of the
community banking unit’s goodwill was needed. A significant change to the
analysis was also made by redefining the community banking unit as the
consolidated company, therefore including funding sources and investments that
had previously been allocated to the treasury unit. This was done since (1) the
treasury area was used by the community banking operations more than any other
part of the organization and (2) funding sources such as debentures that were
issued in a trust preferred transaction were obtained to benefit the bank’s
capital position. The implied fair value of goodwill was determined after
valuing the community banking unit of the Company using primarily Level 3 inputs
based primarily on historical deal prices for community banks, adjusted for bank
size and credit quality factors. This resulted in a fair value of the community
banking unit that was less than the book value by approximately $17 million. 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.
In comparing the fair value allocations in the March 2009 test to the November
and December 2008 tests, the primary differences were (1) a lower fair value
estimate for the community banking unit based on the valuation using observable
merger transaction prices, (2) the deterioration in the fair value of the trust
preferred-related debentures which were liabilities of the banking unit in the
March 2009 test but were liabilities of the treasury unit in previous tests, and
(3) a decreased correlation between the deterioration in the estimated fair
value of the banking unit and the deterioration in the estimated fair value of
the loan portfolio from the 2008 periods when the difference between book value
and estimated fair value of the banking unit approximated the difference between
book value and estimated fair value of the loan portfolio to the March 2009 test
when the two amounts were further apart. 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 through the second quarter of
2009 as it traded between a low of $4.05 per share and a high of $6.19 per
share. The stock price closed at $4.07 on June 30, 2009, prompting management to
revisit the goodwill impairment first step calculations from the March 31, 2009
test. Based on updated data from second quarter bank deal activity and observed
required market rates of return for bank equities, management determined that
the estimated fair value of the Company, and therefore the banking unit,
exceeded its book value as of June 30, 2009.





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.


43





FIRST M
& F CORPORATION





Income
Taxes





Due to a
significant addition to the provision for loan losses, a non-tax deductible
goodwill impairment charge and other intangible asset impairments the Company
incurred pre-tax losses and accrued an income tax benefit for the first half of
2009. The $10.252 million tax benefit for 2009 includes a deferred tax benefit
of $4.168 million and a current tax benefit of $6.084 million. At June 30, 2009,
the Company had a current tax benefit receivable of $8.582 million and a
deferred tax asset of $8.750 million. Over the past five years the Company has
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 current taxes receivable increase as losses
are realized through loan charge-offs and collateral foreclosures and
dispositions. 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 2009’s financial results:





IntangibleAsset andBefore
                    
                    
                    Goodwill
                    
                    
                    Loan LossImpairments and
                    
                    
                    Impairment
                    
                    
                    Accrual
                    
                    
                    Loss(Dollars in thousands)
                    
                    Loan Loss Accrual
                    
                    
                    Effect
                    
                    
                    Effect
                    
                    
                    DisclosedNet
      income (loss) before tax
                    
                    $
                    3,465
                    
                    
                    $
                    (17,048
                    )
                    
                    $
                    (29,035
                    )
                    
                    $
                    (42,618
                    )Income
      taxes
                    
                    
                    1,043
                    
                    
                    
                    (465
                    )
                    
                    
                    (10,830
                    )
                    
                    
                    (10,252
                    )Net
      income (loss) beforenoncontrolling
      interests
                    
                    $
                    2,422
                    
                    
                    $
                    (16,583
                    )
                    
                    $
                    (18,205
                    )
                    
                    $
                    (32,366
                    )Effective
      tax rate beforenoncontrolling
      interests
                    
                    
                    30.10
                    %
                    
                    
                    2.73
                    %
                    
                    
                    37.30
                    %
                    
                    
                    24.06
                    %





The
Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB Statement No. 109” as of January 31,
2007 with no adjustment for uncertain tax positions, and therefore no effect on
the Company’s financial position or results of operations. The Company had no
recognized uncertain tax positions as of June 30, 2008 or 2009 and therefore did
not have any tax accruals during the first six months of 2008 or 2009 related to
uncertain positions.





Assets
and Liabilities





Assets
increased by .49% from June 30, 2008 to June 30, 2009, and increased by 1.78%
from December 31, 2008. Investments increased by 39.67% from June 30, 2008 to
June 30, 2009, and increased by 45.69% from December 31, 2008. The Company
purchased $47.085 million in government agency securities and $83.780 million in
mortgage-backed and related securities during the first half of 2009. Liquidity
from deposit growth, a reduction in the loan portfolio and funds received
through the U. S. Treasury CPP program was used to fund the purchases. Liquidity
provided by deposit growth, maturities of government-sponsored agencies and
sales of small mortgage-backed securities during the first and second quarters
of 2008 were also used to purchase mortgage-backed securities and municipal
bonds, as the loan portfolio did not require any additional funding. Real
estate-related loans decreased during the first and second quarters of 2009 as
the Company sought to remove problem real estate loans and diversify into other
areas. Commercial loans grew during the first half while consumer loans started
to show growth during the second quarter of 2009. The Company began the process
of diversifying the product mix of the loan portfolio during the first quarter
by de-emphasizing commercial and residential construction loans. A renewed
emphasis is being made on consumer and small business commercial loans. Loans
held to maturity decreased by 7.32% from June 30, 2008 to June 30, 2009, and
decreased by 5.85% from December 31, 2008. Management expects that the loan
portfolio’s decline 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 commercial
loans. Loans as a percent of total assets were 68.16% at June 30, 2009, 73.68%
at December 31, 2008, and 73.90% at June 30, 2008.


44





FIRST M
& F CORPORATION





The
following table shows loans held for investment by type as of June 30, 2009,
December 31, 2008, and June 30, 2008:





(Dollars in thousands)
                
                June 30, 2009
                
                
                December 31, 2008
                
                
                June 30, 2008Commercial
      real estate
                
                $
                672,359
                
                
                $
                745,700
                
                
                $
                752,437Residential
      real estate
                
                
                205,068
                
                
                
                209,696
                
                
                
                210,813Home
      equity lines
                
                
                44,827
                
                
                
                45,791
                
                
                
                45,623Commercial,
      financial and agricultural
                
                
                135,325
                
                
                
                127,704
                
                
                
                139,933Consumer
                
                
                40,728
                
                
                
                37,908
                
                
                
                39,501Other
      loans
                
                
                9,434
                
                
                
                9,796
                
                
                
                6,895Total
                
                $
                1,107,741
                
                
                $
                1,176,595
                
                
                $
                1,195,202Mortgages
      held for sale
                
                $
                4,125
                
                
                $
                3,803
                
                
                $
                4,127Student
      loans held for sale
                
                
                772
                
                
                
                3,895
                
                
                
                2,200





Deposits
increased by 3.25% from June 30, 2008 to June 30, 2009, and increased by 3.82%
from December 31, 2008. The following table shows the breakdown by deposit
category of core deposits and public funds deposits growth from December 31,
2008 to June 30, 2009:





Core Customers
                
                
                Public Funds
                
                
                Total Deposits(Dollars in thousands)
                
                Increase (Decrease)
                
                
                Increase (Decrease)
                
                
                Increase (Decrease)Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.Noninterest-bearing
                
                $
                (600
                )
                
                
                (0.35
                )%
                
                $
                3,074
                
                
                
                44.13
                %
                
                $
                2,474
                
                
                
                1.38
                %NOW
                
                
                28,111
                
                
                
                16.60
                
                
                
                40,820
                
                
                
                85.01
                
                
                
                68,931
                
                
                
                31.72MMDA
                
                
                (22,345
                )
                
                
                (14.06
                )
                
                
                3,093
                
                
                
                13.21
                
                
                
                (19,252
                )
                
                
                (10.56
                )Savings
                
                
                (1,293
                )
                
                
                (1.14
                )
                
                
                73
                
                
                
                15.57
                
                
                
                (1,220
                )
                
                
                (1.07
                )Customer
      CDs
                
                
                38,950
                
                
                
                8.54
                
                
                
                (37,615
                )
                
                
                (40.33
                )
                
                
                1,335
                
                
                
                0.24Brokered
      CDs
                
                
                (5,188
                )
                
                
                (30.46
                )
                
                
                1,080
                
                
                
                43.81
                
                
                
                (4,108
                )
                
                
                (21.07
                )Total
                
                $
                37,635
                
                
                
                3.46
                %
                
                $
                10,525
                
                
                
                6.03
                %
                
                $
                48,160
                
                
                
                3.82
                %





Interest-bearing
checking and certificate of deposit core customer deposits were up during the
first six months of 2009. Interest-bearing checking deposits grew by $40.820
million during the first six months of 2009 from non-core sources such as
municipalities. These balances tend to be short-lived and decline during the
third quarter of each year. The interest-bearing Summit Checking account
continued to be the sales leader for deposit products into 2009. The Summit
Checking account was introduced during the fourth quarter of 2007. This account
is designed to pay a premium deposit rate if the customer meets certain criteria
related to electronic banking and debit card transaction activity. Summit
accounts, which are classified as NOW accounts, increased by $15.467 million
during the first quarter of 2009 and by $4.746 million during the second
quarter. Certificates of deposit held by municipalities decreased during the
first six months of 2009 as the Company became less aggressive in its
rate-bidding process for these types of deposits. However, the Company has seen
some disintermediation during 2009 as customer funds have flowed into
certificates of deposit and out of money-market deposit accounts as well as out
of other investments such as mutual funds. Customer and employee incentives were
used during 2008 to promote checking and interest-bearing transaction accounts
over more price-sensitive certificates of deposit. The Company’s long-term
strategy is to build the core customer deposit base and rely less on borrowed
funds as a primary source of liquidity. 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 will still look to those sources
to help maintain the spread between the yield on earning assets and the cost of
funds.


45





FIRST M
& F CORPORATION





The
following table shows the deposit mix as of June 30, 2009, December 31, 2008,
and June 30, 2008:





(Dollars in thousands)
                
                June 30, 2009
                
                
                December 31, 2008
                
                
                June 30, 2008Noninterest-bearing
      demand
                
                $
                181,163
                
                
                $
                178,689
                
                
                $
                187,145NOW
      deposits
                
                
                286,265
                
                
                
                217,334
                
                
                
                215,521Money
      market deposits
                
                
                163,112
                
                
                
                182,364
                
                
                
                192,372Savings
      deposits
                
                
                113,061
                
                
                
                114,281
                
                
                
                117,645Certificates
      of deposit
                
                
                550,559
                
                
                
                549,224
                
                
                
                548,020Brokered
      certificates of deposit
                
                
                15,387
                
                
                
                19,495
                
                
                
                7,674Total
                
                $
                1,309,547
                
                
                $
                1,261,387
                
                
                $
                1,268,377





The
following table shows the mix of public funds deposits as of June 30, 2009,
December 31, 2008, and June 30, 2008:





(Dollars in thousands)
                
                June 30, 2009
                
                
                December 31, 2008
                
                
                June 30, 2008Noninterest-bearing
      demand
                
                $
                10,039
                
                
                $
                6,965
                
                
                $
                7,308NOW
      deposits
                
                
                88,839
                
                
                
                48,019
                
                
                
                52,049Money
      market deposits
                
                
                26,504
                
                
                
                23,411
                
                
                
                31,732Savings
      deposits
                
                
                542
                
                
                
                469
                
                
                
                345Certificates
      of deposit
                
                
                55,650
                
                
                
                93,265
                
                
                
                93,250Brokered
      certificates of deposit
                
                
                3,545
                
                
                
                2,465
                
                
                
                1,782Total
                
                $
                185,119
                
                
                $
                174,594
                
                
                $
                186,466





Other
borrowings decreased by $16.392 million from June 30, 2008 to June 30, 2009 and
by $15.572 million from December 31, 2008. The decreases in borrowings were
primarily funded through liquidity provided by deposit growth and loan portfolio
paydowns. Amounts of borrowings maturing within one year increased from 33.18%
of other borrowings at December 31, 2008 to 58.11% at June 30, 2009. 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.


46





FIRST M
& F CORPORATION





Equity





The
Company’s and Bank’s regulatory capital ratios at June 30, 2009, 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.





The
Company repurchased 7,500 shares during the first six months of 2008 at an
average price of $15.55 per share. The Company did not repurchase any shares
during the first six months of 2009. The Company did not issue any shares upon
the exercise of stock options during the first six months of 2008 or 2009. As
disclosed in Note 7 to the financial statements, “Preferred Stock, Common Stock
Warrant and Dividend” the Company issued 30,000 shares of Class B, Series A
Preferred Stock and a warrant for 513,113 shares of common stock with an
exercise price of $8.77 on February 27, 2009 to the U. S. Treasury under the
provisions of the TARP Capital Purchase Program for total proceeds of $30.000
million. Approximately $28.637 million of the proceeds were allocated to the
preferred stock with the remaining $1.363 million being allocated to additional
paid-in capital for the common stock warrant. The preferred stock is treated as
Tier 1 capital for risk-based capital measurement purposes. The Company was
approved for up to $40.000 million in the Capital Purchase Program during the
fourth quarter of 2008. Management decided to request $30.000 million of the
approved amount for several reasons: (1) the economy had experienced significant
deterioration since the beginning of 2008, (2) there was much uncertainty
regarding the timing and extent of the next economic recovery and (3) the
economic uncertainty called for prudence when projecting the path of real estate
values for illiquid and depressed markets. Management believes that the Capital
Purchase Program proceeds will serve as excellent insurance against the effects
of further economic deterioration on the Company’s capital and will also serve
as a source of liquidity when prudent lending opportunities arise.





The
Company’s shares, listed as FMFC on the NASDAQ Global Select Market, trade at
the rate of approximately 2,500 shares per day. The stock price was listed at
$4.07 on June 30, 2009.


47





FIRST M
& F CORPORATION





Interest
Rate Risk and Liquidity Management





Responsibility
for managing the Company’s program for controlling and monitoring interest rate
risk and liquidity risk and for maintaining income stability, given the
Company’s exposure to changes in interest rates, is vested in the
asset/liability committee. Appropriate policy and guidelines, approved by the
board of directors, govern these actions. Monitoring is primarily accomplished
through monthly reviews and analysis of asset and liability repricing
opportunities, market conditions and expectations for the economy. Cash flow
analyses are also used to project short-term interest rate risks and liquidity
risks. Management believes, at June 30, 2009, there is adequate flexibility to
alter the current rate and maturity structures as necessary to minimize the
exposure to changes in interest rates, should they occur. The Company is
currently in a 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.





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.
Also, as part of this evaluation, individual loans are reviewed for impairment.
An impairment exists if management estimates that it is probable that the
Company will be unable to collect all contractual payments due. For
collateral-dependent loans, those for which the repayment is expected to be
provided solely by the underlying collateral, impairment is based on the value
of the related collateral. Otherwise, impairment is based on the estimated
present value of expected cash flows discounted at the effective interest rate
of the loan. The material estimates necessary in this process make it inherently
subjective and make the estimates subject to significant changes and may add
volatility to earnings as provisions are adjusted. Loans not individually tested
for impairment are grouped into risk-rated pools and evaluated based on
historical loss experience. Additionally management considers specific external
credit risk factors (“environmental factors”) that may not be reflected in
historical loss rates such as: (1) a potential for a slow-down in the real
estate market and its effect on real estate concentrations; (2) competitive
trends in loan to value exception rates; (3) general economic conditions; (4)
higher fuel costs; and (5) reviews of underwriting standards in our various
markets. These and other environmental factors are reviewed on a quarterly
basis.


48





FIRST M
& F CORPORATION





The
Company has experienced stress in the construction and land development
portfolio as well as in its commercial real estate-secured portfolio. The
Company experienced a large increase in the amount of past due and non-accrual
real estate-secured construction and commercial loans during 2008. This trend
has continued into 2009. Many of these loans, as a result of internal and
external loan reviews, have been classified as watch loans and in many cases
significantly downgraded for the Company’s internal credit monitoring systems.
Many of the construction-related borrowers are without cash and cannot market
properties due to the lack of qualified, interested buyers. When construction
borrowers cannot meet their obligations the Company is required to recognize
losses due to the loss of value of the underlying collateral properties by
adding to the allowance for loan losses through additional provisions. The
provision for the second quarter of 2009 was $9.195 million as compared to
$6.080 million for the second quarter of 2008 and $19.840 million for the first
quarter of 2009. Management is working to find a way to create an orderly and
timely liquidation of the collateral properties with a minimum of loss to the
Company and the customer. In an effort to address and change the risk profile of
the Company’s balance sheet, management has decided to de-emphasize residential
and commercial construction loans and re-emphasize consumer and small business
loans.





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





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





Past Due90 Days
                
                
                
                
                
                Year-To-Date(Dollars in thousands)
                
                Outstanding
                
                
                And Still
                
                
                
                
                
                NetBalances
                
                
                Accruing
                
                
                Nonaccrual
                
                
                Charge-OffsConstruction
      and development loans:06/30/09
                
                $
                208,956
                
                
                $
                1,750
                
                
                $
                44,393
                
                
                $
                18,37812/31/08
                
                
                255,655
                
                
                
                3,227
                
                
                
                13,724
                
                
                
                3,99906/30/08
                
                
                264,090
                
                
                
                1,211
                
                
                
                5,821
                
                
                
                283Loans
      secured by 1-4 family properties:06/30/09
                
                $
                249,895
                
                
                $
                72
                
                
                $
                6,227
                
                
                $
                1,68412/31/08
                
                
                255,487
                
                
                
                668
                
                
                
                2,726
                
                
                
                1,90106/30/08
                
                
                256,436
                
                
                
                500
                
                
                
                664
                
                
                
                761Commercial
      real estate-secured loans:06/30/09
                
                $
                390,813
                
                
                $
                379
                
                
                $
                18,409
                
                
                $
                19012/31/08
                
                
                406,886
                
                
                
                553
                
                
                
                2,575
                
                
                
                88306/30/08
                
                
                374,999
                
                
                
                131
                
                
                
                2,942
                
                
                
                273


49





FIRST M
& F CORPORATION





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





(Dollars in thousands)
                  
                  June 30
                  
                  
                  December 31
                  
                  
                  June 302009
                  
                  
                  2008
                  
                  
                  2008Nonaccrual
      loans
                  
                  $
                  74,420
                  
                  
                  $
                  20,564
                  
                  
                  $
                  11,317Other
      real estate
                  
                  
                  22,575
                  
                  
                  
                  11,061
                  
                  
                  
                  6,545Investment
      securities
                  
                  
                  1,047
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      non-performing assets
                  
                  $
                  98,042
                  
                  
                  $
                  31,625
                  
                  
                  $
                  17,862Past
      due 90 days or more and stillaccruing
      interest
                  
                  $
                  5,608
                  
                  
                  $
                  5,686
                  
                  
                  $
                  4,013Restructured
      loans (accruing)
                  
                  
                  3,633
                  
                  
                  
                  3,664
                  
                  
                  
                  -Ratios:Nonaccrual
      loans to loans
                  
                  
                  6.69
                  %
                  
                  
                  1.74
                  %
                  
                  
                  .94
                  %Past
      due 90 day loans to loans
                  
                  
                  .50
                  %
                  
                  
                  .48
                  %
                  
                  
                  .33
                  %Non-performing
      credit assets to loans and other real estate
                  
                  
                  8.54
                  %
                  
                  
                  2.65
                  %
                  
                  
                  1.48
                  %Non-performing
      assets to assets
                  
                  
                  6.03
                  %
                  
                  
                  1.98
                  %
                  
                  
                  1.10
                  %





Off-Balance
Sheet Arrangements





The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At June 30, 2009, the Company had
$152.281 million in unused loan commitments outstanding. Of these commitments,
$106.144 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 second
quarter. At June 30, 2009, the Company had $6.092 million in financial standby
letters of credit issued and outstanding.





At June
30, 2009, there were $100 thousand in standby letters of credit issued on the
Company’s behalf by a Federal Home Loan Bank (FHLB). At December 31, 2008 there
were $31.009 million of standby letters of credit issued on the Company’s behalf
by a Federal Home Loan Bank. The Company typically uses these letters of credit
as additional collateral on public funds deposits and is obligated to the
Federal Home Loan Bank if the letters of credit must be drawn upon.





Liabilities
of $18 thousand at June 30, 2009 and $146 thousand at June 30, 2008 are
recognized in Other Liabilities related to the obligation to stand ready to
perform related to standby letters of credit.





The
Company makes commitments to originate mortgage loans that will be held for
sale. The total commitments to originate mortgages to be held for sale were
$9.265 million at June 30, 2009. These commitments are accounted for as
derivatives and are marked to fair value with changes in fair value recorded in
mortgage banking income. At June 30, 2009, mortgage origination-related
derivatives with positive fair values of $83 thousand were included in other
assets and derivatives with negative fair values of $24 thousand were included
in other liabilities.


50





FIRST M
& F CORPORATION





The
Company also engages in forward sales contracts with mortgage investors to
purchase mortgages held for sale. Those forward sale agreements that have a
determined price and expiration date are accounted for as derivatives and marked
to fair value through mortgage banking income. At June 30, 2009, the Company had
$6.850 million in locked forward sales agreements in place. At June 30, 2009,
forward sale-related derivatives with positive fair values of $41 thousand were
included in other assets and derivatives with negative fair values of $31
thousand were included in other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. There
were $14.235 million of sold mortgages that were still in the recourse period as
of June 30, 2009. The Company may also be required to repurchase mortgages that
do not conform to FNMA or FHA underwriting standards or that contain critical
documentation errors or fraud. The Company has not sustained any
recourse-related losses in its mortgage program and the repurchase of mortgages
has been an extremely rare event.





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





Critical
Accounting Policies





The
preparation of the Company’s financial statements requires management to make
certain judgments and assumptions in determining critical accounting estimates
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and obligations. Management
evaluates these judgments and estimates on an ongoing basis to determine if
changes are needed. Management believes that the following critical accounting
policies affect the more significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements.





Allowance
for loan losses





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





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





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


51





FIRST M
& F CORPORATION





Goodwill,
intangible assets and related impairments





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





Impairment
of goodwill is recognized by a charge against earnings and is 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, and
(2) discount rates and earnings multiples used to determine the present value of
those cash flows. Management uses a model similar to those used to evaluate
potential mergers and acquisitions. Management may engage and rely on
third-party experts to perform some or all of the procedures related to the
steps involved in goodwill impairment testing to help management determine the
existence and extent of any goodwill impairment of a reporting
unit.





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





Contingent
liabilities





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





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


52





FIRST M
& F CORPORATION





Accounting
Pronouncements





In
December 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141 (revised 2007), “Business Combinations.” This Statement
establishes principles and requirements for how an acquirer (a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, (b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase and (c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement defines the acquirer as the
entity that obtains control of one or more businesses in the combination. This
Statement also requires that an acquirer recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. This Statement
also requires an acquirer to recognize assets acquired and liabilities assumed
arising from contractual contingencies as of the acquisition date, measured at
their acquisition-date fair values. This Statement also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is not allowed. The adoption of this Statement did not have a material
impact on the Company’s financial condition or results of
operations.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.”  This
Statement establishes accounting and reporting standards that require (a) the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity, (b) the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of operations, (c) changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently, (d) when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value and (e) entities provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is not allowed.
The Company adopted this Statement as of January 1, 2009 and has applied it
retrospectively to prior periods that are disclosed in the financial statements.
The adoption of this Statement did not have a material impact on the Company’s
financial condition or results of operations.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133.” This Statement
requires entities to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This Statement requires (a) that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation, (b) that fair
values of derivative instruments and their gains and losses be provided in a
tabular format showing the location in an entity’s financial statements of both
derivative positions existing at period end and the effect of using derivatives
during the reporting period, (c) that information be disclosed about
credit-risk-related contingent features and their effect on liquidity, and (d)
that cross-referencing be used within the footnotes to help users of financial
statements locate important information about derivative instruments. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after November 15, 2008. This Statement encourages, but
does not require, comparative disclosures for earlier periods at initial
adoption. The Company adopted this Statement as of January 1, 2009 with no
material impact on its financial condition or results of
operations.


53





FIRST M
& F CORPORATION





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.” This Statement
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. This Statement defines (i) the period after the balance
sheet date during which a reporting entity’s management should evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet date. This
Statement became effective for the Company’s financial statements for periods
ending after June 15, 2009. In the June 30, 2009 financial statements, Note 13 –
Subsequent Events includes the disclosures required by this
Statement.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets, an Amendment of FASB Statement No. 140.” This Statement amends SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. This Statement
eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This Statement also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. This Statement will be effective January 1, 2010
and is not expected to have a significant impact on the Company’s financial
condition or results of operations.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R).” This Statement amends FIN 46 (revised December 2003), “Consolidation of
Variable Interest Entities,” 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.
This Statement 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. This Statement will be effective January 1, 2010 and is not expected
to have a significant impact on the Company’s financial condition or results of
operations.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of
FASB Statement No. 162.” This Statement replaces SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” and establishes the FASB Accounting
Standards Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with generally
accepted accounting principles. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative guidance
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. All non-grandfathered, non-SEC accounting literature not
included in the Codification is superseded and deemed non-authoritative. This
Statement will be effective for the Company’s financial statements for periods
ending after September 15, 2009. The adoption of this Statement is not expected
to have a significant impact on the Company’s financial condition or results of
operation.





In April
2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, “Determination of
the Useful Life of Intangible Assets.” This Staff Position amends factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.” This Staff Position makes the
assumptions used to determine the useful life for renewable intangible assets
for amortization purposes more consistent with the assumptions used to assign a
fair value to the asset under FASB Statement No. 141 (revised 2007), “Business
Combinations.” This Staff Position is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted this FSP as of January 1, 2009. The
adoption of this FSP did not have a material impact on its financial condition
or results of operations.


54





FIRST M
& F CORPORATION





In June
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” This Staff Position states that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective
starting on January 1, 2009 and requires that previous quarterly earnings per
share be retrospectively adjusted to conform to the provisions of the FSP. The
Company adopted this FSP as of January 1, 2009 and restated prior period
earnings per share through its retrospective application. The adoption of this
FSP did not have a material impact on the Company’s financial condition or
results of operations.





In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active.” This FSP clarifies the application of SFAS No. 157 in an inactive
market, without changing its existing principles, by using an example to
illustrate key considerations in determining fair value when there is no market
in which active pricing of an instrument is occurring. The FSP was effective
immediately upon issuance. The Company adopted the FSP in October 2008 with no
material impact on its financial condition or results of
operations.





In
December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets.” This FSP adds disclosures
related to postretirement benefit plan assets to provide the financial statement
reader with an understanding of (a) how investment allocation decisions are
made, including factors that are pertinent to an understanding of investment
policies and strategies, (b) the major categories of plan assets, (c) the inputs
and valuation techniques used to measure the fair value of plan assets, (d) the
effect of fair value measurements using significant unobservable inputs (Level
3) on changes in plan assets for the period and (e) significant concentrations
of risk within plan assets. This FSP is effective for financial statements
issued for fiscal years ending after December 15, 2009. The Company does not
expect the adoption of this FSP to have a material impact on its financial
condition or results of operations.





In
January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, “Amendments
to the Impairment Guidance of EITF Issue No. 99-20.” This FSP makes the factors
that can be evaluated when determining whether an other-than-temporary
impairment exists for beneficial interests similar to those that are allowed for
other investment securities under FASB Statement No 115. EITF 99-20 had
previously required the beneficial interest holder to use a market participant’s
view of expected cash flow without consideration of other cash flow-related
factors that the beneficial owner would typically use their own judgment about.
The FSP is effective for interim and annual reporting periods ending after
December 15, 2008. The Company adopted the FSP as of December 31, 2008, with no
material effect on its financial condition or results of
operations.


55





FIRST M
& F CORPORATION





In April
2009, the FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.” This
FSP affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. This FSP requires an entity to
base its conclusion about whether a transaction was not orderly on the weight of
the evidence. This FSP also amends SFAS No. 157, “Fair Value Measurements,” to
expand certain disclosure requirements. This FSP is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted in
certain circumstances. The Company adopted the provisions of the FSP as of April
1, 2009. The adoption of this FSP did not have a material effect on its
financial condition or results of operation.





In April
2009, the FASB issued FASB Staff Position No. FAS 115-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” This FSP (1) changes existing
guidance for determining whether an impairment is other than temporary to debt
securities, and (2) replaces the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis. Under this
FSP, based on the intent and more likely than not assertions, declines in the
fair value of securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses, with the remainder being recognized in
other comprehensive income. The amount of the impairment related to other
factors is recognized in other comprehensive income. This FSP is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted. The Company adopted the provisions of the FSP as of April 1, 2009.
The adoption of this FSP did not have a material effect on its financial
condition or results of operation. The Company did recognize through earnings
the credit portion of an other-than-temporary impairment on an investment
security as described in Note 3 – Investment Securities, to the financial
statements.





In April
2009, the FASB issued FASB Staff Position No. FAS 107-1, “Interim Disclosures
about Fair Value of Financial Instruments.” This FSP requires the entity to
provide disclosures about fair value of financial instruments in interim
financial information and amends Accounting Principles Board (APB) Opinion No.
28, “Interim Financial Reporting,” to require those disclosures in summarized
financial information at interim reporting periods. Under this FSP, a publicly
traded company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, an entity must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by SFAS No. 107. This FSP is effective for interim periods
ending after June 15, 2009, with early adoption permitted. The Company adopted
the provisions of the FSP as of April 1, 2009. The adoption of this FSP did not
have a material effect on its financial condition or results of
operation.





In April
2009, the FASB issued FASB Staff Position No. FAS 141R-1, “Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This FSP amends the guidance in SFAS No. 141R to require that
assets acquired and liabilities assumed in a business combination that arise
from contingencies be recognized at fair value if fair value can be reasonably
estimated. If fair value of such an asset or liability cannot be reasonably
estimated, the asset or liability would generally be recognized in accordance
with SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation (FIN)
No. 14, “Reasonable Estimation of the Amount of a Loss.” This FSP removes
subsequent accounting guidance for assets and liabilities arising from
contingencies from SFAS No. 141R and requires entities to develop a systematic
and rational basis for subsequently measuring and accounting for assets and
liabilities arising from contingencies. This FSP eliminates the requirement to
disclose an estimate of the range of outcomes of recognized contingencies at the
acquisition date. For unrecognized contingencies, entities are required to
include only the disclosures required by SFAS No. 5. This FSP also requires that
contingent consideration arrangements of an acquiree assumed by the acquirer in
a business combination be treated as contingent consideration of the acquirer
and should be initially and subsequently measured at fair value in accordance
with SFAS No. 141R. This FSP is effective for assets and liabilities arising
from contingencies the Company may acquire in business combinations occurring
after January 1, 2009. The Company adopted this FSP as of April 1, 2009 with no
material effect on its financial condition or results of
operation.


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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 0.33% 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 0.83% decrease
in net interest income; therefore the Company’s repricing gap suggests a
potential earnings benefit should rates decrease.





An
analysis of the change in market value of equity shows how an interest rate
shock will affect the difference between the market value of assets and the
market value of liabilities. With all financial instruments being stated at
market value, the market value of equity will decrease by 2.44% with an
immediate and sustained increase in interest rates of 200 basis points. The
market value of equity will decrease by 4.46% with an immediate and sustained
decrease in interest rates of 100 basis points.





The
Company had no hedging instruments in place at June 30, 2009.





Item
4 - Controls and Procedures





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





As of
June 30, 2009, (the "Evaluation Date"), the Company's Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures as defined in the Exchange Act
Rules.  Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are sufficiently effective to ensure that material
information relating to the Company and required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. During the last quarter ended June 30, 2009 there
has been no change in the Company’s internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.





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


57





FIRST M
& F CORPORATION





PART
II: OTHER INFORMATION





Item
1 - Legal Proceedings





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





Item
1A – Risk Factors





There
have been no material changes in the risk factors previously disclosed under
Part I - Item 1A of the Company’s 2008 Form 10-K.





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





None.





Item
3 – Defaults Upon Senior Securities





None.





Item
4 – Submission of Matters to a Vote of Security Holders





The
annual stockholders’ meeting was held on April 8, 2009. Two items were voted on
at the meeting.





Item 1. Election of
Directors


The
stockholders elected five directors to serve three year terms expiring in April
2012 as summarized below:





Directors Elected
                                    Votes For
                                    Votes WithheldClass I
      (three year term):Jeffrey
      B. Lacey
                                    6,574,712
                                    382,205John
      Clark Love, III
                                    6,642,624
                                    314,293Susan
      McCaffrey
                                    6,802,641
                                    154,276Larry
      Terrell
                                    6,644,026
                                    312,891James
      I. Tims
                                    6,899,424
                                    57,493





There
were 9,169,596 shares entitled to vote on the proposals, with 7,129,390 shares,
or 77.75% actually being voted.





Item 2. Advisory Vote on
Compensation of Executive Officers


The
American Recovery and Reinvestment Act of 2009 requires recipients of funds
under the Capital Purchase Program to permit a separate shareholder vote to
approve the compensation of executives. The stockholders approved the executive
compensation as follows:





Votes For
              Votes Against
              Abstained6,616,278
              134,302
              109,498





There
were 96,839 broker non-votes.





Item
5 – Other Information





None.


58





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 12 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.


59





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 :
August 7, 2009





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


60





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 12 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.


61