UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2009


Or





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from __________ to __________





Commission
File Number 000-09424





FIRST M&F
CORPORATION


(Exact
name of registrant as specified in its charter)





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





662-289-5121(Registrant’s
      telephone number, including area code)No Change(Former
      name, former address and former fiscal year,if
      changed since the last
report)





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








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


 ̈
Yes    ̈
No





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





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





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


 ̈
Yes   x
No




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





Common stock, $5 par value
              9,069,346 SharesTitle
      of Class
              Shares
      Outstanding at October 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
                      32Item
      3
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      60Item
      4
                      Controls
      and Procedures
                      61PART
      II:
                      OTHER
      INFORMATIONItem
      1
                      Legal
      Proceedings
                      62Item
      1A
                      Risk
      Factors
                      62Item
      2
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      62Item
      3
                      Defaults
      upon Senior Securities
                      62Item
      4
                      Submission
      of Matters to a Vote of Security Holders
                      62Item
      5
                      Other
      Information
                      62Item
      6
                      Exhibits
                      63SIGNATURES
                      64EXHIBIT
      INDEXCERTIFICATIONS


2





FIRST M
& F CORPORATION AND SUBSIDIARY





PART
I: FINANCIAL INFORMATION


Item
1 – Financial Statements (Unaudited)


Consolidated
Statements of Condition




(Dollars
      in thousands)September 30
                          
                          
                          December
      312009
                          
                          
                          2008
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Note 1)AssetsCash
      and due from banks
                          
                          $
                          38,809
                          
                          
                          $
                          41,791
                          
                          
                          $
                          47,738Interest
      bearing bank balances
                          
                          
                          57,934
                          
                          
                          
                          10,721
                          
                          
                          
                          6,556Federal
      funds sold
                          
                          
                          50,000
                          
                          
                          
                          31,000
                          
                          
                          
                          9,350Securities
      available for sale, amortized cost of $296,828, $220,477 and
      $223,882
                          
                          
                          303,305
                          
                          
                          
                          219,953
                          
                          
                          
                          227,145Loans
      held for sale
                          
                          
                          6,726
                          
                          
                          
                          5,466
                          
                          
                          
                          7,698Loans,
      net of unearned income
                          
                          
                          1,099,108
                          
                          
                          
                          1,206,213
                          
                          
                          
                          1,176,595Allowance
      for loan losses
                          
                          
                          (32,695
                          )
                          
                          
                          (19,618
                          )
                          
                          
                          (24,918
                          )Net
      loans
                          
                          
                          1,066,413
                          
                          
                          
                          1,186,595
                          
                          
                          
                          1,151,677Bank
      premises and equipment
                          
                          
                          43,574
                          
                          
                          
                          44,739
                          
                          
                          
                          44,642Accrued
      interest receivable
                          
                          
                          8,280
                          
                          
                          
                          10,099
                          
                          
                          
                          9,832Other
      real estate
                          
                          
                          28,114
                          
                          
                          
                          7,191
                          
                          
                          
                          11,061Goodwill
                          
                          
                          16,772
                          
                          
                          
                          32,572
                          
                          
                          
                          32,572Other
      intangible assets
                          
                          
                          5,546
                          
                          
                          
                          7,248
                          
                          
                          
                          7,127Bank
      owned life insurance
                          
                          
                          20,895
                          
                          
                          
                          20,372
                          
                          
                          
                          20,522Other
      assets
                          
                          
                          30,101
                          
                          
                          
                          23,518
                          
                          
                          
                          20,945$
                          1,676,469
                          
                          
                          $
                          1,641,265
                          
                          
                          $
                          1,596,865Liabilities and Stockholders’
      EquityLiabilities:Noninterest-bearing
      deposits
                          
                          $
                          196,999
                          
                          
                          $
                          178,980
                          
                          
                          $
                          178,689Interest-bearing
      deposits
                          
                          
                          1,159,818
                          
                          
                          
                          1,072,483
                          
                          
                          
                          1,082,698Total
      deposits
                          
                          
                          1,356,817
                          
                          
                          
                          1,251,463
                          
                          
                          
                          1,261,387Federal
      funds purchased and repurchase agreements
                          
                          
                          12,164
                          
                          
                          
                          11,938
                          
                          
                          
                          9,728Other
      borrowings
                          
                          
                          133,751
                          
                          
                          
                          197,547
                          
                          
                          
                          151,547Junior
      subordinated debt
                          
                          
                          30,928
                          
                          
                          
                          30,928
                          
                          
                          
                          30,928Accrued
      interest payable
                          
                          
                          2,973
                          
                          
                          
                          3,577
                          
                          
                          
                          3,537Other
      liabilities
                          
                          
                          6,086
                          
                          
                          
                          4,896
                          
                          
                          
                          3,770Total
      liabilities
                          
                          
                          1,542,719
                          
                          
                          
                          1,500,349
                          
                          
                          
                          1,460,897Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Class
      B; 1,000,000 shares authorized; 30,000 shares issued
                          
                          
                          28,778
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      stock of $5.00 par value; 15,000,000 shares authorized: 9,069,346,
      9,061,846 and 9,063,346 shares issued
                          
                          
                          45,347
                          
                          
                          
                          45,309
                          
                          
                          
                          45,317Additional
      paid-in capital
                          
                          
                          31,922
                          
                          
                          
                          30,421
                          
                          
                          
                          30,447Nonvested
      restricted stock awards
                          
                          
                          765
                          
                          
                          
                          789
                          
                          
                          
                          780Retained
      earnings
                          
                          
                          25,242
                          
                          
                          
                          65,700
                          
                          
                          
                          60,133Accumulated
      other comprehensive income (loss)
                          
                          
                          1,695
                          
                          
                          
                          (1,321
                          )
                          
                          
                          (727
                          )First
      M&F Corporation equity
                          
                          
                          133,749
                          
                          
                          
                          140,898
                          
                          
                          
                          135,950Noncontrolling
      interest in subsidiaries
                          
                          
                          1
                          
                          
                          
                          18
                          
                          
                          
                          18Total
      equity
                          
                          
                          133,750
                          
                          
                          
                          140,916
                          
                          
                          
                          135,968$
                          1,676,469
                          
                          
                          $
                          1,641,265
                          
                          
                          $
                          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
                            
                            
                            Nine Months EndedSeptember 30
                            
                            
                            September 302009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Interest
      income:Interest
      and fees on loans
                            
                            $
                            16,798
                            
                            
                            $
                            19,675
                            
                            
                            $
                            50,147
                            
                            
                            $
                            62,160Interest
      on loans held for sale
                            
                            
                            76
                            
                            
                            
                            46
                            
                            
                            
                            192
                            
                            
                            
                            241Taxable
      investments
                            
                            
                            2,507
                            
                            
                            
                            2,179
                            
                            
                            
                            7,318
                            
                            
                            
                            6,893Tax-exempt
      investments
                            
                            
                            519
                            
                            
                            
                            554
                            
                            
                            
                            1,617
                            
                            
                            
                            1,607Federal
      funds sold
                            
                            
                            22
                            
                            
                            
                            10
                            
                            
                            
                            61
                            
                            
                            
                            144Interest
      bearing bank balances
                            
                            
                            4
                            
                            
                            
                            15
                            
                            
                            
                            12
                            
                            
                            
                            120Total
      interest income
                            
                            
                            19,926
                            
                            
                            
                            22,479
                            
                            
                            
                            59,347
                            
                            
                            
                            71,165Interest
      expense:Deposits
                            
                            
                            5,758
                            
                            
                            
                            7,266
                            
                            
                            
                            18,249
                            
                            
                            
                            25,136Federal
      funds purchased and repurchase agreements
                            
                            
                            26
                            
                            
                            
                            98
                            
                            
                            
                            83
                            
                            
                            
                            259Other
      borrowings
                            
                            
                            1,345
                            
                            
                            
                            1,596
                            
                            
                            
                            4,120
                            
                            
                            
                            5,035Junior
      subordinated debt
                            
                            
                            499
                            
                            
                            
                            499
                            
                            
                            
                            1,488
                            
                            
                            
                            1,488Total
      interest expense
                            
                            
                            7,628
                            
                            
                            
                            9,459
                            
                            
                            
                            23,940
                            
                            
                            
                            31,918Net
      interest income
                            
                            
                            12,298
                            
                            
                            
                            13,020
                            
                            
                            
                            35,407
                            
                            
                            
                            39,247Provision
      for loan losses
                            
                            
                            4,805
                            
                            
                            
                            2,190
                            
                            
                            
                            33,840
                            
                            
                            
                            9,050Net
      interest income after provision for loan losses
                            
                            
                            7,493
                            
                            
                            
                            10,830
                            
                            
                            
                            1,567
                            
                            
                            
                            30,197Noninterest
      income:Service
      charges on deposit accounts
                            
                            
                            2,804
                            
                            
                            
                            3,042
                            
                            
                            
                            8,138
                            
                            
                            
                            8,765Mortgage
      banking income
                            
                            
                            468
                            
                            
                            
                            389
                            
                            
                            
                            1,428
                            
                            
                            
                            1,014Agency
      commission income
                            
                            
                            1,097
                            
                            
                            
                            1,153
                            
                            
                            
                            3,025
                            
                            
                            
                            3,191Trust
      and brokerage income
                            
                            
                            120
                            
                            
                            
                            117
                            
                            
                            
                            372
                            
                            
                            
                            453Bank
      owned life insurance income
                            
                            
                            200
                            
                            
                            
                            139
                            
                            
                            
                            564
                            
                            
                            
                            487Other
      income
                            
                            
                            488
                            
                            
                            
                            694
                            
                            
                            
                            1,988
                            
                            
                            
                            2,384Securities
      gains (losses), net
                            
                            
                            441
                            
                            
                            
                            (17
                            )
                            
                            
                            442
                            
                            
                            
                            5Total
      investment other-than-temporary impairment losses
                            
                            
                            (1,231
                            )
                            
                            
                            -
                            
                            
                            
                            (1,624
                            )
                            
                            
                            -Portion
      of loss recognized in other comprehensive income(before
      taxes)
                            
                            
                            994
                            
                            
                            
                            -
                            
                            
                            
                            1,212
                            
                            
                            
                            -Net
      investment impairment losses recognized
                            
                            
                            (237
                            )
                            
                            
                            -
                            
                            
                            
                            (412
                            )
                            
                            
                            -Total
      noninterest income
                            
                            
                            5,381
                            
                            
                            
                            5,517
                            
                            
                            
                            15,545
                            
                            
                            
                            16,299Noninterest
      expenses:Salaries
      and employee benefits
                            
                            
                            7,106
                            
                            
                            
                            7,230
                            
                            
                            
                            21,566
                            
                            
                            
                            22,193Net
      occupancy expenses
                            
                            
                            1,134
                            
                            
                            
                            1,084
                            
                            
                            
                            3,308
                            
                            
                            
                            3,115Equipment
      expenses
                            
                            
                            706
                            
                            
                            
                            882
                            
                            
                            
                            2,195
                            
                            
                            
                            2,671Software
      and processing expenses
                            
                            
                            465
                            
                            
                            
                            518
                            
                            
                            
                            1,458
                            
                            
                            
                            1,475Telecommunication
      expenses
                            
                            
                            269
                            
                            
                            
                            317
                            
                            
                            
                            784
                            
                            
                            
                            865Marketing
      and business development expenses
                            
                            
                            327
                            
                            
                            
                            381
                            
                            
                            
                            1,047
                            
                            
                            
                            1,050Foreclosed
      property expenses
                            
                            
                            508
                            
                            
                            
                            191
                            
                            
                            
                            2,790
                            
                            
                            
                            807FDIC
      insurance assessments
                            
                            
                            750
                            
                            
                            
                            107
                            
                            
                            
                            2,565
                            
                            
                            
                            250Goodwill
      impairment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            15,800
                            
                            
                            
                            -Intangible
      asset amortization and impairment
                            
                            
                            107
                            
                            
                            
                            122
                            
                            
                            
                            1,581
                            
                            
                            
                            364Other
      expenses
                            
                            
                            2,768
                            
                            
                            
                            2,397
                            
                            
                            
                            7,902
                            
                            
                            
                            7,253Total
      noninterest expenses
                            
                            
                            14,140
                            
                            
                            
                            13,229
                            
                            
                            
                            60,996
                            
                            
                            
                            40,043Income
      (loss) before income taxes
                            
                            
                            (1,266
                            )
                            
                            
                            3,118
                            
                            
                            
                            (43,884
                            )
                            
                            
                            6,453Income
      tax expense (benefit)
                            
                            
                            (1,137
                            )
                            
                            
                            902
                            
                            
                            
                            (11,389
                            )
                            
                            
                            1,555Net
      income (loss)
                            
                            
                            (129
                            )
                            
                            
                            2,216
                            
                            
                            
                            (32,495
                            )
                            
                            
                            4,898Net
      income (loss) attributable to noncontrolling interests
                            
                            
                            7
                            
                            
                            
                            6
                            
                            
                            
                            (7
                            )
                            
                            
                            15Net
      income (loss) attributable to First M&F Corporation
                            
                            $
                            (136
                            )
                            
                            $
                            2,210
                            
                            
                            $
                            (32,488
                            )
                            
                            $
                            4,883Dividends
      and accretion on preferred stock
                            
                            
                            435
                            
                            
                            
                            -
                            
                            
                            
                            1,028
                            
                            
                            
                            -Net
      income (loss) applicable to common stock
                            
                            $
                            (571
                            )
                            
                            $
                            2,210
                            
                            
                            $
                            (33,516
                            )
                            
                            $
                            4,883Net
      income (loss) allocated to common shareholders
                            
                            $
                            (580
                            )
                            
                            $
                            2,183
                            
                            
                            $
                            (33,167
                            )
                            
                            $
                            4,822Earnings
      (loss) per share:Basic
                            
                            $
                            (.06
                            )
                            
                            $
                            .24
                            
                            
                            $
                            (3.66
                            )
                            
                            $
                            .53Diluted
                            
                            $
                            (.06
                            )
                            
                            $
                            .24
                            
                            
                            $
                            (3.66
                            )
                            
                            $
                            .53





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


4





FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income


(Unaudited)





(Dollars
      in thousands)
                
                Three Months Ended
                
                
                Nine Months EndedSeptember 30
                
                
                September 302009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (129
                )
                
                $
                2,216
                
                
                $
                (32,495
                )
                
                $
                4,898Other
      comprehensive income:Change
      in unrealized gains (losses) on securities available for sale, net of tax
      of $991 and $223 for the three months ended September 30 and $1,208 and
      $403 for the nine months ended September 30
                
                
                1,667
                
                
                
                372
                
                
                
                2,036
                
                
                
                (679
                )Reclassification
      adjustment for impairment losses on securities available for sale included
      in net income, net of tax of $89 and $0 for the three months ended
      September 30 and $154 and $0 for the nine months ended September
      30
                
                
                148
                
                
                
                -
                
                
                
                258
                
                
                
                -Reclassification
      adjustment for (gains) losses on securities available for sale included in
      net income, net of tax of $165 and $6 for the three months ended September
      30 and $165 and $2 for the nine months ended September 30
                
                
                (276
                )
                
                
                11
                
                
                
                (277
                )
                
                
                (3
                )Defined
      benefit pension plan:Transition
      obligation amortization, net of tax of $0 and $1 for the three months
      ended September 30 and $2 and $3 for the nine months ended September
      30
                
                
                (1
                )
                
                
                (1
                )
                
                
                (3
                )
                
                
                (4
                )Prior
      service cost amortization, net of tax of $4 and $3 for the three months
      ended September 30 and $10 and $10 for the nine months ended September
      30
                
                
                (6
                )
                
                
                (5
                )
                
                
                (18
                )
                
                
                (17
                )Actuarial
      loss amortization, net of tax of $84 and $30 for the three months ended
      September 30 and $253 and $91 for the nine months ended September
      30
                
                
                142
                
                
                
                50
                
                
                
                426
                
                
                
                153Other
      comprehensive income (loss)
                
                
                1,674
                
                
                
                427
                
                
                
                2,422
                
                
                
                (550
                )Total
      comprehensive income (loss)
                
                
                1,545
                
                
                
                2,643
                
                
                
                (30,073
                )
                
                
                4,348Comprehensive
      income (loss) attributable to noncontrolling interests
                
                
                7
                
                
                
                6
                
                
                
                (7
                )
                
                
                15Comprehensive
      income (loss) of First M&F Corp
                
                $
                1,538
                
                
                $
                2,637
                
                
                $
                (30,066
                )
                
                $
                4,333





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


5





FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Stockholders' Equity


Nine
Months Ended September 30, 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
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,883
                            
                            
                            
                            -
                            
                            
                            
                            15
                            
                            
                            
                            4,898Cash
      dividends ($.39 per share)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,580
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (3,580
                            )7,500
      common shares repurchased
                            
                            
                            -
                            
                            
                            
                            (38
                            )
                            
                            
                            (80
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (118
                            )1,500
      restricted share awards vested
                            
                            
                            -
                            
                            
                            
                            9
                            
                            
                            
                            21
                            
                            
                            
                            (30
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Share-based
      compensation expense recognized
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5
                            
                            
                            
                            176
                            
                            
                            
                            2
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            183Net
      change
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (550
                            )
                            
                            
                            -
                            
                            
                            
                            (550
                            )Distributions
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (15
                            )
                            
                            
                            (15
                            )September
      30, 2008
                            
                            $
                            -
                            
                            
                            $
                            45,309
                            
                            
                            $
                            30,421
                            
                            
                            $
                            789
                            
                            
                            $
                            65,700
                            
                            
                            $
                            (1,321
                            )
                            
                            $
                            18
                            
                            
                            $
                            140,916January
      1, 2009
                            
                            $
                            -
                            
                            
                            $
                            45,317
                            
                            
                            $
                            30,447
                            
                            
                            $
                            780
                            
                            
                            $
                            60,133
                            
                            
                            $
                            (727
                            )
                            
                            $
                            18
                            
                            
                            $
                            135,968Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (32,488
                            )
                            
                            
                            -
                            
                            
                            
                            (7
                            )
                            
                            
                            (32,495
                            )Cash
      dividends ($.15 per share)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,375
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,375
                            )Issuance
      of 30,000 shares of preferred stock
                            
                            
                            28,637
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            28,637Issuance
      of stock warrant for 513,113 shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,363
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,363Dividends
      and accretion on preferred stock
                            
                            
                            141
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,028
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (887
                            )6,000
      restricted share awards vested
                            
                            
                            -
                            
                            
                            
                            30
                            
                            
                            
                            71
                            
                            
                            
                            (101
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Share-based
      compensation expense recognized
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            14
                            
                            
                            
                            86
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            100Tax
      benefits on restricted stock dividends paid
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            27
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            27Net
      change
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,422
                            
                            
                            
                            -
                            
                            
                            
                            2,422Distributions
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (10
                            )
                            
                            
                            (10
                            )September
      30, 2009
                            
                            $
                            28,778
                            
                            
                            $
                            45,347
                            
                            
                            $
                            31,922
                            
                            
                            $
                            765
                            
                            
                            $
                            25,242
                            
                            
                            $
                            1,695
                            
                            
                            $
                            1
                            
                            
                            $
                            133,750





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


6





FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





(Dollars
      in thousands)
                
                Nine Months Ended September
    302009
                
                
                2008Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (32,495
                )
                
                $
                4,898Adjustments
      to reconcile net income (loss)
                  to
      net cash provided by operating activities:Share-based
      compensation
                
                
                100
                
                
                
                183Amortization
      of pension costs
                
                
                658
                
                
                
                90Depreciation
      and amortization
                
                
                2,387
                
                
                
                2,545Goodwill
      impairment
                
                
                15,800
                
                
                
                -Intangible
      asset impairments
                
                
                1,248
                
                
                
                -Provision
      for loan losses
                
                
                33,840
                
                
                
                9,050Net
      investment amortization (accretion)
                
                
                770
                
                
                
                (125
                )Net
      change in unearned fees/deferred costs on loans
                
                
                (76
                )
                
                
                (405
                )Capitalized
      dividends on FHLB stock
                
                
                (16
                )
                
                
                (204
                )Net
      accretion of discount on time deposits
                
                
                2
                
                
                
                33Gain
      on securities available for sale
                
                
                (442
                )
                
                
                (5
                )Impairment
      loss on securities available for sale
                
                
                412
                
                
                
                -Gain
      on loans held for sale
                
                
                (775
                )
                
                
                (694
                )Other
      asset sales losses
                
                
                1,887
                
                
                
                555Deferred
      income taxes
                
                
                (4,398
                )
                
                
                (2,534
                )Originations
      of loans held for sale, net of repayments
                
                
                (86,140
                )
                
                
                (52,045
                )Sales
      proceeds of loans held for sale
                
                
                87,906
                
                
                
                52,848(Increase)
      decrease in:Accrued
      interest receivable
                
                
                1,552
                
                
                
                2,335Cash
      surrender value of bank owned life insurance
                
                
                (564
                )
                
                
                (487
                )Other
      assets
                
                
                (6,425
                )
                
                
                (23
                )Increase
      (decrease) in:Accrued
      interest payable
                
                
                (565
                )
                
                
                (1,574
                )Other
      liabilities
                
                
                2,124
                
                
                
                1,999Net
      cash provided by operating activities
                
                
                16,790
                
                
                
                16,440Cash
      flows from investing activities:Purchases
      of securities available for sale
                
                
                (141,454
                )
                
                
                (74,988
                )Sales
      of securities available for sale
                
                
                14,127
                
                
                
                5,858Maturities
      of securities available for sale
                
                
                53,640
                
                
                
                85,358Net
      (increase) decrease in:Interest
      bearing bank balances
                
                
                (51,378
                )
                
                
                (7,241
                )Federal
      funds sold
                
                
                (40,650
                )
                
                
                (29,000
                )Loans
                
                
                18,559
                
                
                
                2,579Bank
      premises and equipment
                
                
                (929
                )
                
                
                (1,352
                )Net
      benefits received (purchases) of bank owned life insurance
                
                
                191
                
                
                
                (56
                )Proceeds
      from sales of other real estate and other repossessed
    assets
                
                
                13,940
                
                
                
                5,809Net
      redemptions of FHLB stock
                
                
                225
                
                
                
                387Net
      cash used in investing activities
                
                
                (133,729
                )
                
                
                (12,646
                )





(Continued)


7





FIRST M
& F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





(Dollars
      in thousands)
                
                Nine Months Ended September
    302009
                
                
                2008Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                
                $
                95,428
                
                
                $
                (11,025
                )Net
      increase in short-term borrowings
                
                
                2,436
                
                
                
                2,262Proceeds
      from other borrowings
                
                
                20,000
                
                
                
                200,500Repayments
      of other borrowings
                
                
                (37,796
                )
                
                
                (204,267
                )Earnings
      distributions to noncontrolling interests
                
                
                (10
                )
                
                
                (15
                )Common
      dividends paid
                
                
                (1,375
                )
                
                
                (3,580
                )Preferred
      dividends paid
                
                
                (700
                )
                
                
                -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
                
                
                108,010
                
                
                
                (16,243
                )Net
      decrease in cash and due from banks
                
                
                (8,929
                )
                
                
                (12,449
                )Cash
      and due from banks at January 1
                
                
                47,738
                
                
                
                54,240Cash
      and due from banks at September 30
                
                $
                38,809
                
                
                $
                41,791Total
      interest paid
                
                $
                24,497
                
                
                $
                33,463Total
      income taxes paid
                
                
                97
                
                
                
                2,859Income
      tax refunds received
                
                
                27
                
                
                
                -Transfers
      of loans to foreclosed property
                
                
                32,877
                
                
                
                7,124U.
      S. Treasury preferred dividend accrued but unpaid
                
                
                187
                
                
                
                -Accretion
      on U. S. Treasury preferred stock
                
                
                141
                
                
                
                -





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


8





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 1:  Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. The condensed balance sheet as of December 31, 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 Company is substantially in the
business of community banking and therefore is considered a banking operation
with no separately reportable segments. 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





Generally
accepted accounting principles (GAAP) define 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. GAAP 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. Assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the
fair value measurement. The fair value hierarchy is as follows:





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





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





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


9





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





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





Fair
      Value Measurements atSeptember 30, 2009, UsingQuotedPrices
      InActiveMarkets
                  
                  
                  SignificantAssets/Liabilities
                  
                  
                  For
                  
                  
                  Other
                  
                  
                  SignificantMeasured
      at Fair
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableValue
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs(Dollars
      in thousands)
                  
                  September 30, 2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)U.S.
      Treasury securities
                  
                  $
                  523
                  
                  
                  $
                  -
                  
                  
                  $
                  523
                  
                  
                  $
                  -U.S.
      Government sponsored entities
                  
                  
                  55,650
                  
                  
                  
                  -
                  
                  
                  
                  55,650
                  
                  
                  
                  -Mortgage-backed
      investments
                  
                  
                  180,647
                  
                  
                  
                  -
                  
                  
                  
                  180,647
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  61,099
                  
                  
                  
                  -
                  
                  
                  
                  61,099
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  2,040
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,040Other
      debt securities
                  
                  
                  2,357
                  
                  
                  
                  -
                  
                  
                  
                  2,357
                  
                  
                  
                  -Equity
      securities
                  
                  
                  989
                  
                  
                  
                  -
                  
                  
                  
                  989
                  
                  
                  
                  -Total
      securities available for sale
                  
                  $
                  303,305
                  
                  
                  $
                  -
                  
                  
                  $
                  301,265
                  
                  
                  $
                  2,040Mortgage
      derivative assets
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  -Mortgage
      derivative liabilities
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  -




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 atSeptember 30, 2008, UsingQuotedPrices
      InActiveMarkets
                    
                    
                    SignificantAssets/Liabilities
                    
                    
                    For
                    
                    
                    Other
                    
                    
                    SignificantMeasured
      at Fair
                    
                    
                    Identical
                    
                    
                    Observable
                    
                    
                    UnobservableValue
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    Inputs(Dollars
      in thousands)
                    
                    September 30, 2008
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)U.S.
      Treasury securities
                    
                    $
                    538
                    
                    
                    $
                    -
                    
                    
                    $
                    538
                    
                    
                    $
                    -U.S.
      Government sponsored entities
                    
                    
                    12,467
                    
                    
                    
                    -
                    
                    
                    
                    12,467
                    
                    
                    
                    -Mortgage-backed
      investments
                    
                    
                    138,928
                    
                    
                    
                    -
                    
                    
                    
                    138,928
                    
                    
                    
                    -Obligations
      of states and political subdivisions
                    
                    
                    59,970
                    
                    
                    
                    -
                    
                    
                    
                    59,970
                    
                    
                    
                    -Collateralized
      debt obligations
                    
                    
                    4,094
                    
                    
                    
                    -
                    
                    
                    
                    4,094
                    
                    
                    
                    -Other
      debt securities
                    
                    
                    3,541
                    
                    
                    
                    -
                    
                    
                    
                    3,541
                    
                    
                    
                    -Equity
      securities
                    
                    
                    415
                    
                    
                    
                    -
                    
                    
                    
                    415
                    
                    
                    
                    -Total
      securities available for sale
                    
                    $
                    219,953
                    
                    
                    $
                    -
                    
                    
                    $
                    219,953
                    
                    
                    $
                    -Mortgage
      derivative assets
                    
                    
                    78
                    
                    
                    
                    -
                    
                    
                    
                    78
                    
                    
                    
                    -Mortgage
      derivative liabilities
                    
                    
                    16
                    
                    
                    
                    -
                    
                    
                    
                    16
                    
                    
                    
                    -





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 trade infrequently and are reported using
Level 2 inputs. The fair value measurements are obtained from both an
independent pricing service and from a pricing matrix that considers observable
inputs obtained from a municipal security data provider such as dealer quotes,
market yield curves, credit information (including observable default rates) and
the instrument’s contractual terms and conditions, among other
things.





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





Collateralized debt
obligations. The Company owns certain beneficial interests in
collateralized debt obligations secured by community bank trust preferred
securities. These interests have an amortized cost of $4.610 million with
estimated fair values of $2.040 million. These interests do not trade in a
liquid market, and therefore, market quotes are not a reliable indicator of
their ultimate realizability. The Company utilizes a discounted cash flow model
based on market yields of trust-preferred securities, adjusted for liquidity
factors and expected cash flows which include assumptions related to defaults,
deferrals and prepayments to determine the fair values of these beneficial
interests. Many of the factors that adjust the timing and extent of cash flows
are based on judgment and not directly observable in the markets. Therefore,
these fair values are classified as Level 3 valuations for accounting and
disclosure purposes. The Company relies on GAAP related to accounting and
reporting for impairments of securities that are beneficial interests in
determining the nature and extent of impairments in the collateralized debt
obligations that it owns. For these types of interests, GAAP requires that a
discounted cash flow analysis be conducted similar to the discounted cash flow
analyses that are required to determine loan impairments. Generally, decreases
in expected cash flows indicate that a credit-related impairment of the security
is present and an other-than-temporary impairment loss may need to be
recognized. All of the collateralized debt obligations are tested for
other-than-temporary impairment on a quarterly basis. During the second quarter
2009 analysis, one security with a par value of $750 thousand 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. During the
third quarter testing, two additional securities with par values of $1.000
million each did not pass the test and were determined to have
other-than-temporary impairments of $69 thousand and $168 thousand. These
additional impairments were recorded as losses in the statement of operations
for the third quarter of 2009.


11





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Equity securities. Equity
securities are comprised of mutual funds that are 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.





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, 2009
                
                $
                -Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                
                
                (412
                )Other-than-temporary
      impairment included in other comprehensive income
                
                
                (1,212
                )Other
      gains/losses included in other comprehensive income
                
                
                (302
                )Purchases,
      issuances, and settlements
                
                
                -Transfers
      in and/or out of Level 3
                
                
                3,966Balance
      at September 30, 2009
                
                $
                2,040The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                
                $
                (412
                )





Fair
      Value Measurements UsingSignificant
      Unobservable Inputs(Dollars
      in thousands)
                
                (Level 3)Collateralized Debt
    ObligationsBalance
      at July 1, 2009
                
                $
                3,254Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                
                
                (237
                )Other-than-temporary
      impairment included in other comprehensive income
                
                
                (994
                )Other
      gains/losses included in other comprehensive income
                
                
                17Purchases,
      issuances, and settlements
                
                
                -Transfers
      in and/or out of Level 3
                
                
                -Balance
      at September 30, 2009
                
                $
                2,040The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                
                $
                (237
                )





The $175
thousand credit-related other-than-temporary loss incurred during the second
quarter of 2009 and $237 thousand credit-related other-than-temporary loss
incurred during the third quarter of 2009 are stated as a separate line item in
the Company’s consolidated statement of operations.


12





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of September 30, 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)
                
                09/30/09 (a)
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                Current Period
                
                
                Current PeriodImpaired
      loans
                
                $
                49,969
                
                
                $
                -
                
                
                $
                49,969
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (1,617
                )Loan
      foreclosures
                
                
                8,971
                
                
                
                -
                
                
                
                -
                
                
                
                8,971
                
                
                
                5,698
                
                
                
                -Other
      real estate
                
                
                839
                
                
                
                -
                
                
                
                -
                
                
                
                839
                
                
                
                -
                
                
                
                (30
                )




Fair Value Measurements
    UsingQuotedPrices
      in
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Fair
      ValueActive
                  
                  
                  Significant
                  
                  
                  
                  
                  
                  Charged
      to
                  
                  
                  AdjustmentFor
      the
                  
                  
                  Markets
      for
                  
                  
                  Other
                  
                  
                  Significant
                  
                  
                  Allowance
                  
                  
                  RecognizedYear-to-Date
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for
      Loan Losses
                  
                  
                  In
      EarningsEnded
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars
      in thousands)
                  
                  09/30/09 (a)
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Current Period
                  
                  
                  Current PeriodImpaired
      loans
                  
                  $
                  49,969
                  
                  
                  $
                  -
                  
                  
                  $
                  49,969
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (22,830
                  )Loan
      foreclosures
                  
                  
                  21,481
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,481
                  
                  
                  
                  9,827
                  
                  
                  
                  -Bankers
      bank stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (78
                  )Other
      real estate
                  
                  
                  2,316
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,316
                  
                  
                  
                  -
                  
                  
                  
                  (427
                  )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 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) provision for loan losses for
impaired loans, (2) other income for the bankers bank stock, (3) foreclosed
property expenses for other real estate, (4) goodwill impairment for goodwill
and (5) intangible asset amortization and impairment for intangible
assets.





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
third 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 $51.586 million were reduced by specific valuation allowance
allocations totaling $1.617 million to a total reported fair value of $49.969
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.


13





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





Loan
Foreclosures.  During 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 3 inputs based on observable market data.
Foreclosed assets measured at fair value upon initial recognition during the
third quarter totaled $9.356 million using Level 3 valuation inputs. During the
third quarter $385 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 $5.766 million. The fair value of the foreclosed assets was recorded in
other real estate.





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. Impairments of $893 thousand
were recorded during the second quarter and $30 thousand during the third
quarter of 2009. Properties with carrying values of $2.577 million that had been
written down during the second quarter of 2009 were disposed of during the third
quarter of 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 GAAP. 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 September 30, 2009 and December 31, 2008:





September 30, 2009
                
                
                December 31, 2008(Dollars
      in thousands)
                
                Carrying
                
                
                Estimated
                
                
                Carrying
                
                
                EstimatedAmount
                
                
                Fair Value
                
                
                Amount
                
                
                Fair ValueFinancial
      assets:Cash
      and short-term investments
                
                $
                146,743
                
                
                $
                146,743
                
                
                $
                63,644
                
                
                $
                63,644Securities
      available for sale
                
                
                303,305
                
                
                
                303,305
                
                
                
                227,145
                
                
                
                227,145Loans
      held for sale
                
                
                6,726
                
                
                
                6,753
                
                
                
                7,698
                
                
                
                7,757Loans
      held for investment
                
                
                1,066,413
                
                
                
                994,546
                
                
                
                1,151,677
                
                
                
                1,111,202Agency
      accounts receivable
                
                
                613
                
                
                
                613
                
                
                
                276
                
                
                
                276Accrued
      interest receivable
                
                
                8,280
                
                
                
                8,280
                
                
                
                9,832
                
                
                
                9,832Nonmarketable
      equity investments
                
                
                7,323
                
                
                
                7,323
                
                
                
                7,610
                
                
                
                7,610Investment
      in unconsolidated VIE
                
                
                928
                
                
                
                928
                
                
                
                928
                
                
                
                928Mortgage
      derivative assets
                
                
                10
                
                
                
                10
                
                
                
                45
                
                
                
                45Financial
      liabilities:Noninterest-bearing
      deposits
                
                
                196,999
                
                
                
                196,999
                
                
                
                178,689
                
                
                
                178,689NOW,
      MMDA and savings deposits
                
                
                562,531
                
                
                
                562,531
                
                
                
                513,979
                
                
                
                513,979Certificates
      of deposit
                
                
                597,287
                
                
                
                602,894
                
                
                
                568,719
                
                
                
                579,874Short-term
      borrowings
                
                
                12,164
                
                
                
                12,164
                
                
                
                9,728
                
                
                
                9,728Other
      borrowings
                
                
                133,751
                
                
                
                137,279
                
                
                
                151,547
                
                
                
                153,295Junior
      subordinated debt
                
                
                30,928
                
                
                
                26,814
                
                
                
                30,928
                
                
                
                36,617Agency
      accounts payable
                
                
                824
                
                
                
                824
                
                
                
                574
                
                
                
                574Accrued
      interest payable
                
                
                2,973
                
                
                
                2,973
                
                
                
                3,537
                
                
                
                3,537Mortgage
      derivative liabilities
                
                
                11
                
                
                
                11
                
                
                
                27
                
                
                
                27Other
      financial instruments:Commitments
      to extend credit and letters of credit
                
                
                (37
                )
                
                
                (411
                )
                
                
                (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 and market yield matrices. We
use an external pricing service to electronically provide prices by CUSIP
number. We use the one price per instrument provided for the securities that the
service can produce prices for. We do not adjust the prices that are obtained
from external pricing services. Typically, all securities except for some small
municipal issues and the collateralized debt obligations are priced by the
primary external provider. For issues that are not priced by the primary
provider, we use the pricing disclosed in the investment accounting product
provided by a broker-dealer affiliate of a correspondent bank. The
broker-dealer’s accounting system uses prices provided by (1) the same external
pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with
market yield inputs provided by Bloomberg and a municipal securities market data
provider and (4) the broker-dealer’s trading staff. Any quotes provided by a
broker-dealer are usually non-binding. However, the Company rarely uses
solicited broker-dealer quotes to price any of its securities. The broker-dealer
prices all municipal securities through its pricing matrix. At September 30,
2009, the only securities that were not priced by the primary provider were 22
municipal bonds representing 6 issuers and the collateralized debt obligations.
We used the broker-dealer’s matrix prices for the municipal securities and a
third-party provider’s modeled prices for the collateralized debt obligations
(CDOs).





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


15





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





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





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





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





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





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





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





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





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





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





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





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





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





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


16





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
2:  (Continued)





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





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





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





Mortgage
origination and sale commitments are considered derivatives and are therefore
carried at fair market value with the changes in market value recorded in
mortgage banking income. Mortgage-related commitments with positive values are
carried in other assets and those with negative balances are carried in other
liabilities in the statement of condition.





Note
3:  Investment Securities and Derivatives





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





Amortized
                
                
                Gross Unrealized
                
                
                Fair(Dollars
      in thousands)
                
                Cost
                
                
                Gains
                
                
                Losses
                
                
                ValueSeptember
      30, 2009:U.S.
      Treasury securities
                
                $
                505
                
                
                $
                18
                
                
                $
                -
                
                
                $
                523U.S.
      Government sponsored entities
                
                
                55,157
                
                
                
                535
                
                
                
                42
                
                
                
                55,650Mortgage-backed
      investments
                
                
                174,354
                
                
                
                6,345
                
                
                
                52
                
                
                
                180,647Obligations
      of states and political subdivisions
                
                
                58,927
                
                
                
                2,185
                
                
                
                13
                
                
                
                61,099Collateralized
      debt obligations
                
                
                4,610
                
                
                
                -
                
                
                
                2,570
                
                
                
                2,040Other
      debt securities
                
                
                2,238
                
                
                
                119
                
                
                
                -
                
                
                
                2,357Equity
      securities
                
                
                1,037
                
                
                
                -
                
                
                
                48
                
                
                
                989$
                296,828
                
                
                $
                9,202
                
                
                $
                2,725
                
                
                $
                303,305December
      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
                
                
                $
                227,145September
      30, 2008:U.S.
      Treasury securities
                
                $
                510
                
                
                $
                28
                
                
                $
                -
                
                
                $
                538U.S.
      Government sponsored entities
                
                
                12,313
                
                
                
                156
                
                
                
                2
                
                
                
                12,467Mortgage-backed
      investments
                
                
                137,649
                
                
                
                1,480
                
                
                
                201
                
                
                
                138,928Obligations
      of states and political subdivisions
                
                
                60,887
                
                
                
                239
                
                
                
                1,156
                
                
                
                59,970Collateralized
      debt obligations
                
                
                5,026
                
                
                
                -
                
                
                
                932
                
                
                
                4,094Other
      debt securities
                
                
                3,667
                
                
                
                -
                
                
                
                126
                
                
                
                3,541Equity
      securities
                
                
                425
                
                
                
                -
                
                
                
                10
                
                
                
                415$
                220,477
                
                
                $
                1,903
                
                
                $
                2,427
                
                
                $
                219,953




17





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Provided
below is a summary of securities available for sale which were in an unrealized
loss position and the length of time that individual securities have been in a
continuous loss position at September 30, 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
                      
                      
                      LossesSeptember
      30, 2009:U.S.
      Government sponsored entities
                      
                      $
                      5,058
                      
                      
                      $
                      42
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      5,058
                      
                      
                      $
                      42Mortgage-backed
      investments
                      
                      
                      5,087
                      
                      
                      
                      52
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,087
                      
                      
                      
                      52Obligations
      of states and political subdivisions
                      
                      
                      1,780
                      
                      
                      
                      2
                      
                      
                      
                      4,583
                      
                      
                      
                      11
                      
                      
                      
                      6,363
                      
                      
                      
                      13Collateralized
      debt obligations
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,040
                      
                      
                      
                      2,570
                      
                      
                      
                      2,040
                      
                      
                      
                      2,570Other
      debt securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Equity
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      362
                      
                      
                      
                      48
                      
                      
                      
                      362
                      
                      
                      
                      48$
                      11,925
                      
                      
                      $
                      96
                      
                      
                      $
                      6,985
                      
                      
                      $
                      2,629
                      
                      
                      $
                      18,910
                      
                      
                      $
                      2,725December
      31, 2008:U.S.
      Government sponsored entities
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Mortgage-backed
      investments
                      
                      
                      14,847
                      
                      
                      
                      89
                      
                      
                      
                      1,802
                      
                      
                      
                      9
                      
                      
                      
                      16,649
                      
                      
                      
                      98Obligations
      of states and political 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




18





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. 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. Management’s
evaluation involved (1) assessing whether significant future cash outflows would
occur that would require the liquidation of securities and (2) determining if
the balance sheet would need to be managed or reduced in a way that would
require the liquidation of securities to meet regulatory capital ratio
requirements. This analysis was performed to determine if it was more likely
than not that the investments would have to be sold before their anticipated
recoveries. Management determined that it was not more likely than not that the
investments would have to be disposed of prior to their anticipated recoveries.
In estimating whether there are other-than-temporary impairment losses on debt
securities management considers (1) the length of time and extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) historical cash flows and economic factors that
could detrimentally affect those cash flows and (4) changes in credit ratings of
the issuers.





There are
five collateralized debt obligations that represent the majority of unrealized
losses in the investment portfolio. These obligations are secured by commercial
bank trust preferred securities. The impairments have arisen due to a virtual
trading halt related to the liquidity crisis in corporate debt, and the effects
of the sub-prime mortgage crisis and the resulting economic deterioration and
ongoing recession on the financial stability of financial institution issuers of
the trust preferred collateral. In December 2008, these CDOs were downgraded to
below investment grade by Moody’s. During 2008 and 2009 several banks that had
issued trust preferred securities that were held as collateral in the some of
the CDOs were closed by federal regulators. These defaults and the credit
downgrades, accompanied by interest deferrals by several other bank issuers,
resulted in reductions in fair value estimates as credit assumptions had to be
revised. Two of the beneficial interests had deferred interest payments and were
placed in nonaccrual status during the second quarter of 2009 resulting in a
reversal of $84 thousand of interest income. A third beneficial interest
deferred an interest payment in October 2009 which will result in its being
placed in nonaccrual status with a resulting $25 thousand reversal of interest
income in the fourth quarter. Management evaluated these instruments for
impairment as of September 30, 2009 within the accounting guidelines for
determining impairments for beneficial interests using the discounted cash flow
approach prescribed, which required Management to make assumptions concerning
the estimates of the ultimate collectability of the contractual cash flows of
the beneficial interests owned. These estimates depend on the expected cash
flows that the beneficial interest issuer will receive on its investments in the
trust preferred securities of the commercial bank investees. The ability of the
banks that issued trust preferred securities to the beneficial interest issuer
to pay their obligations was determined based on an analysis of the financial
condition of the banks. This analysis resulted in an estimate of the timing and
amount of cash flows derived from a determination of how many would default on
their obligations and how many would eventually pay off their obligations and
the timing of those events. Those estimated cash flows would first pay off more
senior beneficial interests, with the remaining amounts flowing through to the
interests owned by the Company. Based on this type of analysis for each
beneficial interest issuer, the cash flows of each of the five beneficial
interests owned by the Company were projected and discounted to their present
values using their original yields and compared to the amortized cost book
values of the interests. This analysis resulted in a determination that an
other-than-temporary impairment (OTTI) condition existed for two of the CDOs
that had amortized costs of $1.000 million and $1.006 million and fair values of
$332 thousand and $443 thousand respectively. A cash flow analysis of each
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 $168 thousand on the first security and $69
thousand on the second. The credit-related portions of the impairments were
charged against current earnings with the remaining unrealized losses of $500
thousand and $494 thousand respectively being charged to other comprehensive
income. A credit-related other-than-temporary impairment of $175 thousand was
recognized as of June 30, 2009 on another CDO. The unrealized losses by
individual security in the CDO portfolio as of September 30, 2009 ranged from
52% of amortized cost to 60% of amortized cost. The two 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 securities that were 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 two 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.


19





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





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
                  
                  
                  Nine
      MonthsEnded September 30
                  
                  
                  Ended September 302009
                  
                  
                  2009Beginning
      balance
                  
                  $
                  175
                  
                  
                  $
                  -Additions
                  
                  
                  237
                  
                  
                  
                  412Ending
      balance
                  
                  $
                  412
                  
                  
                  $
                  412





The fair
values of our investment securities could decline in the future if the
underlying performance of the collateral for the trust preferred CDOs
deteriorates and credit enhancements in the form of seniority in the cash flow
waterfalls do not provide sufficient protection to our contractual principal and
interest. As a result, there is a risk that 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 September
    30
                
                
                Nine Months Ended September
    302009
                
                
                2008
                
                
                2009
                
                
                2008Proceeds
      from sales
                
                $
                12,292
                
                
                $
                2,280
                
                
                $
                14,127
                
                
                $
                5,858Gross
      realized gains
                
                
                450
                
                
                
                9
                
                
                
                451
                
                
                
                31Gross
      realized losses
                
                
                9
                
                
                
                26
                
                
                
                9
                
                
                
                26Gross
      recognized losses related to the credit component of other- than-temporary
      impairments
                
                $
                237
                
                
                $
                -
                
                
                $
                412
                
                
                $
                -





Securities
with a carrying value totaling $233.605 million at September 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.





The
amortized cost and fair values of debt securities available for sale at
September 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
                
                $
                29,580
                
                
                $
                29,761After
      one through five years
                
                
                64,941
                
                
                
                66,369After
      five through ten years
                
                
                21,445
                
                
                
                22,614After
      ten years
                
                
                5,471
                
                
                
                2,925121,437
                
                
                
                121,669Mortgage-backed
      investments
                
                
                174,354
                
                
                
                180,647$
                295,791
                
                
                $
                302,316




20





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
3:  (Continued)





Derivatives





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





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





(Dollars
      in thousands)
                
                September 30, 2009
                
                
                December 31, 2008Notional
                
                
                Positive
                
                
                Negative
                
                
                Notional
                
                
                Positive
                
                
                NegativeInstrument
                
                Amount
                
                
                Fair Value
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value
                
                
                Fair ValueForward
      sale contracts
                
                $
                3,146
                
                
                $
                2
                
                
                $
                5
                
                
                $
                5,568
                
                
                $
                10
                
                
                $
                13Written
      interest rate options (locks)
                
                
                5,130
                
                
                
                8
                
                
                
                6
                
                
                
                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 September
    30
                
                
                Nine Months Ended September
    302009
                
                
                2008
                
                
                2009
                
                
                2008Forward
      sale contracts:Recorded
      in mortgage banking income
                
                $
                (13
                )
                
                $
                (9
                )
                
                $
                -
                
                
                $
                39Written
      interest rate options (locks):Recorded
      in mortgage banking income
                
                
                (32
                )
                
                
                44
                
                
                
                1
                
                
                
                53




21





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 4:
Loans





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





(Dollars
      in thousands)
                
                September 30
                
                
                December
      312009
                
                
                2008
                
                
                2008Commercial,
      financial and agricultural
                
                $
                124,836
                
                
                $
                145,743
                
                
                $
                127,704Non-residential
      real estate
                
                
                677,777
                
                
                
                759,279
                
                
                
                745,700Residential
      real estate
                
                
                197,760
                
                
                
                208,718
                
                
                
                209,696Home
      equity loans
                
                
                44,250
                
                
                
                46,201
                
                
                
                45,791Consumer
      loans
                
                
                44,318
                
                
                
                38,001
                
                
                
                37,908Other
      loans
                
                
                10,167
                
                
                
                8,271
                
                
                
                9,796Total
      loans
                
                $
                1,099,108
                
                
                $
                1,206,213
                
                
                $
                1,176,595





The Bank
uses real estate loans as collateral for borrowings at the Federal Home Loan
Banks. Approximately $846.417 million of real estate loans were pledged under a
blanket lien as collateral for FHLB borrowings at September 30, 2009. The Bank
uses commercial and consumer loans as collateral for borrowings at the Federal
Reserve Bank Discount Window. Approximately $24.408 million of commercial and
consumer loans were pledged for the Federal Reserve line of credit at September
30, 2009.





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





(Dollars
      in thousands)
                
                Three Months Ended September
    30
                
                
                Nine Months Ended September
    302009
                
                
                2008
                
                
                2009
                
                
                2008Beginning
      balance
                
                $
                31,323
                
                
                $
                18,901
                
                
                $
                24,918
                
                
                $
                14,217Loans
      charged off
                
                
                (3,597
                )
                
                
                (1,648
                )
                
                
                (26,684
                )
                
                
                (4,205
                )Recoveries
                
                
                164
                
                
                
                175
                
                
                
                621
                
                
                
                556Net
      charge-offs
                
                
                (3,433
                )
                
                
                (1,473
                )
                
                
                (26,063
                )
                
                
                (3,649
                )Provision
      for loan losses
                
                
                4,805
                
                
                
                2,190
                
                
                
                33,840
                
                
                
                9,050Ending
      balance
                
                $
                32,695
                
                
                $
                19,618
                
                
                $
                32,695
                
                
                $
                19,618





The
provision for loan losses for the first nine months of 2009 included
approximately $28.900 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.


22





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
4:  (Continued)





Loans are
placed on nonaccrual status when, in management’s opinion, the 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)
                
                September
      30,
                
                
                December
      31,2009
                
                
                2008Nonaccrual
      loans
                
                $
                69,019
                
                
                $
                20,564Other
      real estate
                
                
                28,114
                
                
                
                11,061Total
      non-performing credit-related assets
                
                $
                97,133
                
                
                $
                31,625Past
      due 90 days or more and still accruing interest
                
                
                6,351
                
                
                
                5,686Restructured
      loans (accruing)
                
                
                3,664
                
                
                
                3,664





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





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





(Dollars
      in thousands)
                
                September 30, 2009
                
                
                December 31, 2008Balance
      of impaired loans with an allocated allowance
                
                $
                68,369
                
                
                $
                58,966Balance
      of impaired loans with no allocated allowance
                
                
                90,480
                
                
                
                39,468Total
      recorded investment in impaired loans
                
                $
                158,849
                
                
                $
                98,434Amount
      of the allowance allocated to impaired loans
                
                $
                18,833
                
                
                $
                13,282





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


23




FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 5:  Goodwill
and Other Intangible Assets





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





(Dollars
      in thousands)
                  
                  
                  
                  
                  
                  
                  
                  CustomerCore
                  
                  
                  Renewal
                  
                  
                  Noncompete
                  
                  
                  BankingGoodwill
                  
                  
                  Deposits
                  
                  
                  Lists
                  
                  
                  Agreements
                  
                  
                  CharterBalance
      at December 31, 2007
                  
                  $
                  32,572
                  
                  
                  $
                  6,292
                  
                  
                  $
                  228
                  
                  
                  $
                  67
                  
                  
                  $
                  1,025Amortization
      expense
                  
                  
                  -
                  
                  
                  
                  (320
                  )
                  
                  
                  (23
                  )
                  
                  
                  (21
                  )
                  
                  
                  -Balance
      at September 30, 2008
                  
                  $
                  32,572
                  
                  
                  $
                  5,972
                  
                  
                  $
                  205
                  
                  
                  $
                  46
                  
                  
                  $
                  1,025Balance
      at December 31, 2008
                  
                  $
                  32,572
                  
                  
                  $
                  5,865
                  
                  
                  $
                  198
                  
                  
                  $
                  39
                  
                  
                  $
                  1,025Amortization
      expense
                  
                  
                  -
                  
                  
                  
                  (319
                  )
                  
                  
                  (7
                  )
                  
                  
                  (7
                  )
                  
                  
                  -Impairment
      charge
                  
                  
                  (15,800
                  )
                  
                  
                  -
                  
                  
                  
                  (191
                  )
                  
                  
                  (32
                  )
                  
                  
                  (1,025
                  )Balance
      at September 30, 2009
                  
                  $
                  16,772
                  
                  
                  $
                  5,546
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Estimated amortization
    expenseRemainder
      of 2009
                  
                  
                  
                  
                  
                  $
                  1082010
                  
                  
                  
                  
                  
                  
                  4272011
                  
                  
                  
                  
                  
                  
                  4272012
                  
                  
                  
                  
                  
                  
                  4272013
                  
                  
                  
                  
                  
                  
                  4272014
                  
                  
                  
                  
                  
                  
                  427





Goodwill
is tested for impairment annually during the first quarter of each year. An
assessment of impairment may also be performed when circumstances or events
indicate that an impairment of goodwill may be evident. Due to a decrease in
stock price, coupled with increased credit deterioration, a special impairment
test was performed as of December 31, 2008. The special test showed no
impairment. The regular test performed as of January 1, 2009 also 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.


24





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
$2.75 per share at September 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, for Step 1 of the impairment test, 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 September 30, 2009 and 2008 and
December 31, 2008:





(Dollars
      in thousands)
                    
                    September 30
                    
                    
                    December
      312009
                    
                    
                    2008
                    
                    
                    2008Company’s
      line of credit in the amount of $5,000,000, maturing in February 2010;
      secured by approximately 29% of the Bank’s common stock; interest payable
      quarterly at the prime rate with a floor of 3.50%
                    
                    $
                    1,916
                    
                    
                    $
                    2,416
                    
                    
                    $
                    2,416Bank’s
      advances from Federal Home Loan Banks, net of unamortized purchase
      accounting discounts of $0, $2  and $0
                    
                    
                    131,835
                    
                    
                    
                    195,048
                    
                    
                    
                    149,131Other
      mortgages to third parties on other real estate
                    
                    
                    -
                    
                    
                    
                    83
                    
                    
                    
                    -$
                    133,751
                    
                    
                    $
                    197,547
                    
                    
                    $
                    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 capital ratios and a non-performing asset ratio. The increase in
non-performing assets caused the Company to be in violation of the
non-performing asset covenant at September 30, 2009. The correspondent bank has
granted a temporary waiver of this convenant violation.





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. Starting in the fourth quarter of 2009, the Company no longer
operates under a blanket lien of its real estate secured loans, effectively
eliminating its available line for additional borrowings at the FHLB. During the
fourth quarter the Company will pledge individual loans as approved to secure
its borrowings with the FHLB.


25





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
$15.865 million. The line is collateralized by commercial and consumer loans.
The Bank did not utilize the line during the first nine 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 determined using a
discounted cash flow analysis. The fair value of the warrant was determined
using a Black-Scholes option pricing model. The preferred stock cash flows were
determined to be payments of dividends annually at a rate of 5% and a
liquidation of the $30.000 million face value at the end of five years. The
discount rate used was 25%, which seemed reasonable given market yields for
financial institution preferred stocks ranging from 15% to 30%. This resulted in
a preferred stock value of $13.864 million. The warrants were valued using an
expected life of 7.5 years (50% probability at 5 years and 50% probability at 10
years), a volatility of 27.85% (average of historical 10-year, 5-year and 1-year
volatilities of the Company’s stock), an expected dividend yield of 2.50% (50%
probability of 0% and 50% probability of 5%), and a risk-free bond rate of 2.18%
(7-year Treasury rate). The warrant fair value was determined to be $660
thousand. The $30.000 million in CPP proceeds was distributed proportionately to
the preferred stock and warrants resulting in $1.363 million being assigned to
the warrant and $28.637 million being assigned to the preferred stock. The
amount assigned to the preferred stock resulted in an effective book yield of
6.08%, given the dividend rate and discount accretion.





Accretion
of the discount associated with the preferred stock is recognized as an increase
to preferred stock dividends in determining net income available to common
shareholders. The discount is being amortized over a five-year period using the
effective yield method. The discount recognized during the first nine months of
2009 was $141 thousand, with $60 thousand being recognized during the third
quarter.


26





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 8:  Pension
and Other Employee Benefit Plans





As
discussed in Note 18 to the December 31, 2008 financial statements, the Bank has
a defined benefit pension plan covering substantially all full time employees of
the Bank and its subsidiaries. The following table provides a summary of the
components of the Unamortized Pension Costs recognized in stockholders’ equity
as of September 30, 2009 and December 31, 2008:





(Dollars
      in thousands)
                
                Balance
                
                
                2009
                
                
                Balance12/31/08
                
                
                Amortization
                
                
                09/30/09Unamortized
      transition asset
                
                $
                (7
                )
                
                $
                5
                
                
                $
                (2
                )Unamortized
      prior service cost
                
                
                (99
                )
                
                
                28
                
                
                
                (71
                )Unamortized
      actuarial loss
                
                
                4,529
                
                
                
                (679
                )
                
                
                3,8504,423
                
                
                
                (646
                )
                
                
                3,777Deferred
      taxes
                
                
                (1,650
                )
                
                
                241
                
                
                
                (1,409
                )Net
      unamortized pension costs
                
                $
                2,773
                
                
                $
                (405
                )
                
                $
                2,368





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





(Dollars
      in thousands)
                
                Three Months Ended September
    30
                
                
                Nine Months Ended September
    302009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                122
                
                
                
                115
                
                
                
                364
                
                
                
                345Expected
      return on plan assets
                
                
                (118
                )
                
                
                (155
                )
                
                
                (352
                )
                
                
                (465
                )Amortization
      of transition asset
                
                
                (2
                )
                
                
                (2
                )
                
                
                (5
                )
                
                
                (7
                )Amortization
      of prior service costs
                
                
                (9
                )
                
                
                (9
                )
                
                
                (28
                )
                
                
                (28
                )Recognized
      actuarial loss
                
                
                227
                
                
                
                81
                
                
                
                679
                
                
                
                245Net
      pension cost
                
                $
                220
                
                
                $
                30
                
                
                $
                658
                
                
                $
                90





The
Company did not make any contributions to the pension plan during the first nine
months 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 $294 thousand in
matching contributions to the 401k plan during the first nine months of 2009.
The Company made $75 thousand in contributions to the ESOP and $520 thousand in
matching contributions to the 401k plan during the first nine months of
2008.





The
Company has a nonqualified deferred compensation plan for certain senior
officers. Participants deferred $57 thousand of compensation and received $64
thousand in distributions during the first nine months of 2009. Participants
deferred $75 thousand of compensation and received $31 thousand in distributions
during the first nine months of 2008. Employee benefit expenses include credits
for earnings declines attributed to the participants’ accounts of $39 thousand
for the first nine months of 2009 and $34 thousand for the first nine months of
2008. The plan incurred $2 thousand of expenses during the first nine months of
2009 and $2 thousand during the first nine months of 2008. Liabilities of the
plan were $340 thousand at September 30, 2009 and $443 thousand at September 30,
2008, substantially all of which were vested.


27





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
9:  Share-based Compensation





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





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





Nine Months Ended September
    302009
                
                
                2008Number
                
                
                Price
                
                
                Number
                
                
                PriceJanuary
      1
                
                
                135,500
                
                
                $
                16.04
                
                
                
                128,500
                
                
                $
                16.16Expired
                
                
                (99,500
                )
                
                
                16.23
                
                
                
                -
                
                
                
                -Granted
                
                
                4,000
                
                
                
                5.14
                
                
                
                7,000
                
                
                
                13.84September
      30
                
                
                40,000
                
                
                $
                14.28
                
                
                
                135,500
                
                
                $
                16.04Exercisable
      at September 30, 2009
                
                
                24,200
                
                
                $
                15.27Available
      for additional grant at September 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
September 30, 2009, there were $29 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 September 30, 2009, there
were $692 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
                
                
                (15,250
                )
                
                
                16.47Vested
      in 2009
                
                
                (6,000
                )
                
                
                16.86September
      30, 2009
                
                
                85,000
                
                
                $
                16.88





28





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
10:  Accumulated Other Comprehensive Income





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





(Dollars in
      thousands)
                  
                  Gross
                  
                  
                  Tax
                  
                  
                  NetSeptember
      30, 2009:Net
      unrealized gain on securities available for sale
                  
                  $
                  7,689
                  
                  
                  $
                  2,866
                  
                  
                  $
                  4,823Net
      unrealized loss on other-than-temporarily impairedsecurities
      available for sale
                  
                  
                  (1,212
                  )
                  
                  
                  (452
                  )
                  
                  
                  (760
                  )Net
      unamortized pension costs
                  
                  
                  (3,776
                  )
                  
                  
                  (1,408
                  )
                  
                  
                  (2,368
                  )$
                  2,701
                  
                  
                  $
                  1,006
                  
                  
                  $
                  1,695December
      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
                  )September
      30, 2008:Net
      unrealized loss on securities available for sale
                  
                  $
                  (524
                  )
                  
                  $
                  (195
                  )
                  
                  $
                  (329
                  )Net
      unamortized pension costs
                  
                  
                  (1,582
                  )
                  
                  
                  (590
                  )
                  
                  
                  (992
                  )$
                  (2,106
                  )
                  
                  $
                  (785
                  )
                  
                  $
                  (1,321
                  )





Note
11:  Regulatory Matters





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





Quantitative
measures established by regulation to ensure capital adequacy require the
maintenance of minimum amounts and ratios (set forth in the table below) of
Total Capital and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2009, that all
capital adequacy requirements have been met.





As of
September 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.


29


FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note
11:  (Continued)





The
Company's and Bank's actual capital amounts and ratios as of September 30, 2009,
and December 31, 2008, are also presented in the table:





(Dollars
      in thousands)
                
                Actual
                
                
                Minimum Capital
                
                
                Well CapitalizedAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioSeptember
      30, 2009:Total
      capital (to risk weighted assets):Company
                
                $
                157,655
                
                
                
                12.6
                %
                
                $
                100,235
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                -Bank
                
                
                153,386
                
                
                
                12.3
                %
                
                
                100,101
                
                
                
                8.0
                %
                
                
                125,126
                
                
                
                10.0
                %Tier
      I capital (to risk weighted assets):Company
                
                
                141,783
                
                
                
                11.3
                %
                
                
                50,117
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                137,535
                
                
                
                11.0
                %
                
                
                50,050
                
                
                
                4.0
                %
                
                
                75,076
                
                
                
                6.0
                %Tier
      I capital (to average assets):Company
                
                
                141,783
                
                
                
                8.7
                %
                
                
                65,038
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                137,535
                
                
                
                8.5
                %
                
                
                64,998
                
                
                
                4.0
                %
                
                
                81,247
                
                
                
                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.


30





FIRST M
& F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements


(Unaudited)





Note 12:  Earnings
Per Share





GAAP that
became effective this year 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. 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 September
    30
                              
                              
                              Nine Months Ended September
    302009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Net
      income (loss)
                              
                              $
                              (136
                              )
                              
                              $
                              2,210
                              
                              
                              $
                              (32,488
                              )
                              
                              $
                              4,883Preferred
      dividends
                              
                              
                              435
                              
                              
                              
                              -
                              
                              
                              
                              1,028
                              
                              
                              
                              -Net
      income (loss) attributable to common stock
                              
                              
                              (571
                              )
                              
                              
                              2,210
                              
                              
                              
                              (33,516
                              )
                              
                              
                              4,883Net
      income (loss) allocated to common stockholders:Distributed
                              
                              
                              90
                              
                              
                              
                              1,178
                              
                              
                              
                              1,360
                              
                              
                              
                              3,534Undistributed
                              
                              
                              (670
                              )
                              
                              
                              1,005
                              
                              
                              
                              (34,527
                              )
                              
                              
                              1,288$
                              (580
                              )
                              
                              $
                              2,183
                              
                              
                              $
                              (33,167
                              )
                              
                              $
                              4,822Weighted-average
      basic common and participatingshares
      outstanding
                              
                              
                              9,157,705
                              
                              
                              
                              9,176,596
                              
                              
                              
                              9,161,596
                              
                              
                              
                              9,181,220Less:
      weighted average participating restricted shares
    outstanding
                              
                              
                              88,359
                              
                              
                              
                              115,921
                              
                              
                              
                              95,547
                              
                              
                              
                              119,535Weighted-average
      basic shares outstanding
                              
                              
                              9,069,346
                              
                              
                              
                              9,060,675
                              
                              
                              
                              9,066,049
                              
                              
                              
                              9,061,685Basic
      net income (loss) per share
                              
                              $
                              (.06
                              )
                              
                              $
                              .24
                              
                              
                              $
                              (3.66
                              )
                              
                              $
                              .53Weighted-average
      basic common and participatingshares
      outstanding
                              
                              
                              9,157,705
                              
                              
                              
                              9,176,596
                              
                              
                              
                              9,161,596
                              
                              
                              
                              9,181,220Add:
      share-based options and stock warrant
                              
                              
                              -
                              
                              
                              
                              185
                              
                              
                              
                              -
                              
                              
                              
                              1,1509,157,705
                              
                              
                              
                              9,176,781
                              
                              
                              
                              9,161,596
                              
                              
                              
                              9,182,370Less:
      weighted average participating restricted shares
    outstanding
                              
                              
                              88,359
                              
                              
                              
                              115,921
                              
                              
                              
                              95,547
                              
                              
                              
                              119,535Weighted-average
      dilutive shares outstanding
                              
                              
                              9,069,346
                              
                              
                              
                              9,060,860
                              
                              
                              
                              9,066,049
                              
                              
                              
                              9,062,835Dilutive
      net income (loss) per share
                              
                              $
                              (.06
                              )
                              
                              $
                              .24
                              
                              
                              $
                              (3.66
                              )
                              
                              $
                              .53Weighted-average
      shares of potentially dilutive instruments that are not included in the
      dilutive share calculation due to anti-dilutive effect:Compensation
      plan-related stock options
                              
                              
                              37,600
                              
                              
                              
                              138,750
                              
                              
                              
                              70,468
                              
                              
                              
                              135,659Common
      stock warrant
                              
                              
                              513,113
                              
                              
                              
                              -
                              
                              
                              
                              405,980
                              
                              
                              
                              -





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 September 30, 2009 up
through November 9, 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.


31





FIRST M
& F CORPORATION





Item
2 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations





The
following provides a narrative discussion and analysis of significant changes in
the Company’s results of operations and financial condition. This discussion
should be read in conjunction with the interim consolidated financial statements
and supplemental financial data presented elsewhere in this report.





Forward
Looking Statements





Certain
of the information included in this discussion contains forward looking
financial data and information that is based upon management’s belief as well as
certain assumptions made by, and information currently available to management.
Should the assumptions prove to be significantly different, actual results may
vary from those estimated, anticipated, projected or expected. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following:





·
            A
      significant weakening of the
economy.





·
            A
      collapse of real estate values or the values of other assets that may
      serve as collateral on customers’
borrowings.





·
            Adverse
      changes in interest rates that could destabilize the Company’s net
      interest margins.





·
            An
      unanticipated inflationary spike or deflationary
  decline.





·
            A
      market crash or a highly volatile
market.





·
            A
      loss of market liquidity for financial
products.





·
            Unfavorable
      judgments in ongoing litigation.





·
            Technological
      disruptions or breaches.





·
            Unanticipated
      catastrophic events or natural
disasters.





·
            Unforeseen
      new competition from outside the traditional financial services
      industry.





·
            Unanticipated
      changes in laws and regulations related to businesses that the Company is
      in or anticipates entering into or related to transactions that the
      Company engages in or anticipates engaging
in.


32





FIRST M
& F CORPORATION





Financial
Summary





The
Company incurred a net loss for the third quarter of 2009 of $136 thousand, or
$.06 basic and diluted loss per share as compared to income of $2.210 million,
or $.24 basic and diluted earnings per share for the same period in 2008 and a
net loss of $5.111 million or $.61 basic and diluted loss per share for the
second quarter of 2009. The net loss for the first nine months of 2009 was
$32.488 million or $3.66 basic and diluted loss per share as compared to net
income of $4.883 million, or $.53 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 $24.790 million in loan loss
accruals as compared to 2008, (2) a decrease of $107.105 million in loans
outstanding from the third quarter of 2008 to the third quarter of 2009, (3) a
net interest margin of 3.30% for the first nine months of 2009 as compared to
3.70% for the first nine months of 2008, (4) a goodwill impairment charge of
$15.800 million during the first quarter of 2009, and (5) additional intangible
asset impairment charges of $1.248 million during the first quarter of
2009.





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





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


·
            Debit
      card revenues increased by 22.96% for the first nine months of 2009 over
      the first nine months of 2008


·
            The
      net interest margin increased to 3.40% in the third quarter of 2009 from
      3.16% in the second quarter of 2009


·
            Loans
      held for investment decreased by $77.487 million during the first nine
      months of 2009 and by $8.633 million during the third quarter of
      2009


·
            Nonaccrual
      loans were 6.24% of total loans at September 30, 2009 as compared to 1.74%
      at December 31, 2008 and 1.82% at September 30,
  2008


·
            Annualized
      net charge-offs were 1.24% for the third quarter of 2009 as compared to
      6.87% for the second quarter of 2009, to 1.13% for the first quarter of
      2009 and .49% for the third quarter of
2008


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


33


FIRST M
& F CORPORATION





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





(Net change, in
thousands)


Non-Interest
                    
                    
                    InterestLoans
                    
                    
                    Bearing Deposits
                    
                    
                    Bearing Deposits3rd
      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
                    )
                    
                    
                    6,6103rd
      Qtr 2009
                    
                    
                    (8,633
                    )
                    
                    
                    15,835
                    
                    
                    
                    31,434





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





(Net amount, in
thousands)


Net
      Interest
                    
                    
                    Loan
      Loss
                    
                    
                    Non-Interest
                    
                    
                    Non-InterestIncome
                    
                    
                    Accruals
                    
                    
                    Income
                    
                    
                    Expense3rd
      Qtr 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
                    
                    
                    
                    15,8153rd
      Qtr 2009
                    
                    
                    12,298
                    
                    
                    
                    4,805
                    
                    
                    
                    5,381
                    
                    
                    
                    14,140





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





3rd Qtr 2009
                  
                  
                  2nd Qtr2009
                  
                  
                  1st Qtr 2009
                  
                  
                  4th Qtr 2008
                  
                  
                  3rd Qtr 2008Net
      interest income
                  
                  $
                  1.36
                  
                  
                  $
                  1.24
                  
                  
                  $
                  1.31
                  
                  
                  $
                  1.41
                  
                  
                  $
                  1.43Loan
      loss expense
                  
                  
                  .53
                  
                  
                  
                  1.01
                  
                  
                  
                  2.19
                  
                  
                  
                  1.18
                  
                  
                  
                  .24Noninterest
      income
                  
                  
                  .59
                  
                  
                  
                  .55
                  
                  
                  
                  .57
                  
                  
                  
                  .53
                  
                  
                  
                  .61Noninterest
      expense
                  
                  
                  1.56
                  
                  
                  
                  1.74
                  
                  
                  
                  3.42
                  
                  
                  
                  1.57
                  
                  
                  
                  1.46Net
      income (loss) before taxes
                  
                  $
                  (.14
                  )
                  
                  $
                  (.96
                  )
                  
                  $
                  (3.73
                  )
                  
                  $
                  (.81
                  )
                  
                  $
                  .34


34





FIRST M
& F CORPORATION





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





3rd
      Qtr 2009
                    
                    
                    2nd
      Qtr 2009
                    
                    
                    1stQtr
      2009
                    
                    
                    4th
      Qtr 2008
                    
                    
                    3rd
      Qtr 2008Net
      interest margin
                    
                    
                    3.40
                    %
                    
                    
                    3.16
                    %
                    
                    
                    3.33
                    %
                    
                    
                    3.60
                    %
                    
                    
                    3.70
                    %Efficiency
      ratio
                    
                    
                    78.34
                    
                    
                    
                    95.10
                    
                    
                    
                    80.41
                    
                    
                    
                    79.29
                    
                    
                    
                    69.93Return
      on assets
                    
                    
                    (.03
                    )
                    
                    
                    (1.27
                    )
                    
                    
                    (6.71
                    )
                    
                    
                    (1.08
                    )
                    
                    
                    .55Return
      on  total equity
                    
                    
                    (.40
                    )
                    
                    
                    (14.84
                    )
                    
                    
                    (73.59
                    )
                    
                    
                    (12.27
                    )
                    
                    
                    6.27Return
      on common equity
                    
                    
                    (2.13
                    )
                    
                    
                    (20.40
                    )
                    
                    
                    (81.82
                    )
                    
                    
                    (12.27
                    )
                    
                    
                    6.27Noninterest
      income to avg. assets
                    
                    
                    1.30
                    
                    
                    
                    1.24
                    
                    
                    
                    1.28
                    
                    
                    
                    1.19
                    
                    
                    
                    1.37Noninterest
      income to revenues (1)
                    
                    
                    29.81
                    
                    
                    
                    29.92
                    
                    
                    
                    29.81
                    
                    
                    
                    26.90
                    
                    
                    
                    29.16Noninterest
      expense to avg assets
                    
                    
                    3.41
                    
                    
                    
                    3.94
                    
                    
                    
                    7.65
                    
                    
                    
                    3.52
                    
                    
                    
                    3.29Salaries
      and benefits to total noninterest expense
                    
                    
                    50.25
                    
                    
                    
                    46.15
                    
                    
                    
                    23.07
                    
                    
                    
                    47.47
                    
                    
                    
                    54.66Contribution
      margin (2)
                    
                    
                    60.64
                    
                    
                    
                    56.11
                    
                    
                    
                    58.85
                    
                    
                    
                    62.36
                    
                    
                    
                    61.78Nonaccrual
      loans to loans
                    
                    
                    6.24
                    
                    
                    
                    6.69
                    
                    
                    
                    4.51
                    
                    
                    
                    1.74
                    
                    
                    
                    1.8290
      day past due loans to loans
                    
                    
                    .57
                    
                    
                    
                    .50
                    
                    
                    
                    .12
                    
                    
                    
                    .48
                    
                    
                    
                    .05Annualized
      net charge offs as a percent of average loans
                    
                    
                    1.24
                    
                    
                    
                    6.87
                    
                    
                    
                    1.13
                    
                    
                    
                    1.79
                    
                    
                    
                    .49


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


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





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





(Dollars in
      thousands)
                  
                  3rd Qtr 2009
                  
                  
                  2nd Qtr 2009
                  
                  
                  1st Qtr 2009
                  
                  
                  4th Qtr 2008
                  
                  
                  3rd Qtr 2008Mortgage
      originations
                  
                  $
                  23,386
                  
                  
                  $
                  32,438
                  
                  
                  $
                  23,992
                  
                  
                  $
                  14,379
                  
                  
                  $
                  12,926Commissions
      from annuity sales
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  9
                  
                  
                  
                  11
                  
                  
                  
                  18Trust
      revenues
                  
                  
                  52
                  
                  
                  
                  51
                  
                  
                  
                  57
                  
                  
                  
                  56
                  
                  
                  
                  56Retail
      investment revenues
                  
                  
                  68
                  
                  
                  
                  85
                  
                  
                  
                  59
                  
                  
                  
                  75
                  
                  
                  
                  61Revenues
      per FTE employee
                  
                  
                  34
                  
                  
                  
                  31
                  
                  
                  
                  32
                  
                  
                  
                  33
                  
                  
                  
                  34Agency
      commissions per agencyFTE
      employee (1)
                  
                  
                  28
                  
                  
                  
                  25
                  
                  
                  
                  25
                  
                  
                  
                  23
                  
                  
                  
                  29


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





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





3rd Qtr 2009
                
                
                2nd Qtr 2009
                
                
                1st Qtr 2009
                
                
                4th Qtr 2008
                
                
                3rd Qtr 2008Full-time
      equivalent employees
                
                
                523
                
                
                
                529
                
                
                
                535
                
                
                
                543
                
                
                
                548Number
      of noninterest-bearing deposit accounts
                
                
                33,811
                
                
                
                34,116
                
                
                
                34,509
                
                
                
                35,112
                
                
                
                35,907


35





FIRST M
& F CORPORATION





Net
Interest Income





Net
interest income before loan loss expenses for the first nine months of 2009 was
$35.407 million as compared to $39.247 million for the first nine months of
2008. For the first nine months of 2009 compared to 2008: earning asset yields
decreased by 116 basis points, liability costs decreased by 83 basis points, the
net interest spread decreased by 33 basis points and the net interest margin
decreased by 40 basis points.





Net
interest income before loan loss expenses for the third quarter of 2009 was
$12.298 million as compared to $13.020 million for the third quarter of 2008 and
$11.265 million for the second quarter of 2009. For the third quarter of 2009
compared to the same quarter of 2008: earning asset yields decreased by 87 basis
points, liability costs decreased by 63 basis points, the net interest spread
decreased by 24 basis points and the net interest margin decreased by 30 basis
points. For the third quarter of 2009 compared to the second quarter of 2009:
earning asset yields increased by 15 basis points, liability costs decreased by
14 basis points, the net interest spread increased by 29 basis points and the
net interest margin increased by 24 basis points.





Balance
sheet dynamics affecting the comparative net interest margins for the first nine
months of 2009 compared to 2008 include (1) a decrease of 1.41% in average loans
held for investment, (2) a decrease in average loans as a percentage of earning
assets from 82.45% in the first nine months of 2008 to 76.43% in the first nine
months of 2009, (3) an increase in average interest-bearing deposits of 2.41%,
(4) a decrease in average other borrowings of 9.84% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.05%
in 2008 to 11.34% in 2009.





Balance
sheet dynamics affecting the comparative net interest margins for the third
quarter of 2009 compared to 2008 include (1) a decrease of 8.24% in average
loans held for investment, (2) a decrease in average loans as a percentage of
earning assets from 83.30% in the third quarter of 2008 to 74.42% in the third
quarter of 2009, (3) an increase in average interest-bearing deposits of 4.53%,
(4) a decrease in average other borrowings of 8.34% and (5) an increase in
average noninterest-bearing deposits as a percentage of total assets from 11.11%
in 2008 to 11.59% in 2009.





Balance
sheet dynamics affecting the comparative net interest margins for the third
quarter of 2009 compared to the second quarter of 2009 include (1) a decrease of
2.76% in average loans held for investment, (2) a decrease in average loans as a
percentage of earning assets from 76.51% in the second quarter of 2009 to 74.42%
in the third quarter of 2009, (3) an increase in average interest-bearing
deposits of .53%, (4) an increase in average other borrowings of 5.52% and (5)
an increase in average noninterest-bearing deposits as a percentage of total
assets from 11.46% in the second quarter of 2009 to 11.59% in the third quarter
of 2009.





Yield and
cost dynamics affecting the comparative net interest margins for the first nine
months of 2009 compared to 2008 include (1) a decrease of 98 basis points in
yields on loans held for investment and for sale, (2) a decrease of 130 basis
points in investment and short-term funds yields, (3) a decrease of 89 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 third
quarter of 2009 compared to 2008 include (1) a decrease of 46 basis points in
yields on loans held for investment and for sale, (2) a decrease of 162 basis
points in investment and short-term funds yields, (3) a decrease of 66 basis
points in costs of deposits and (4) a decrease of 24 basis points in costs of
borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for the third
quarter of 2009 compared to the second quarter of 2009 include (1) an increase
of 37 basis points in yields on loans held for investment and for sale, (2) a
decrease of 37 basis points in investment and short-term funds yields, (3) a
decrease of 16 basis points in costs of deposits and (4) a decrease of 16 basis
points in costs of borrowings.


36





FIRST M
& F CORPORATION





The
decrease in asset yields for the third quarter and first nine months 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 1.15% in September 2008
to .03% in December 2008 and to .12% in September 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 $1.199
billion during the third quarter of 2008. Continuing the downtrend, average
loans held to maturity decreased from $1.165 billion during the first quarter of
2009 to $1.100 billion during the third 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 6.55% for the third quarter of
2008 and 6.92% for the first nine months of 2008 to 6.08% for the third quarter
of 2009 and 5.94% for the first nine months 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 September 30, 2009 were $69.019 million, representing 6.24%
of the loan portfolio. In contrast, total nonaccrual loans at September 30, 2008
were $22.095 million, or 1.82% of the loan portfolio. Deposit costs decreased to
2.03% for the third quarter of 2009 and 2.17% for the first nine months of 2009
from 2.69% for the third quarter of 2008 and 3.06% for the first nine months of
2008. For the third quarter of 2009 average interest-bearing checking accounts
increased by 30.80% over the fourth quarter of 2008 and by 29.94% over the third
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 third quarter of 2009 grew by 1.43% from the
fourth quarter of 2008 and by 1.99% from the third quarter of 2008. During the
first nine months of 2009, core customer certificate of deposit balances
increased by $47.921 million while rate-bid public certificates decreased by
$16.267 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 and 225 basis points in September 2009. Short-term rates
drifted lower during the second quarter of 2009 while long-term rates began to
move upward. The shape of the yield curve remained about the same during the
third quarter of 2009 after shifting during the second quarter. 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 $53.283 million at September 30, 2008 to $80.420 million
at September 30, 2009.


37





FIRST M
& F CORPORATION





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





Yields/Costs
                
                
                Yields/Costs3rd Quarter, 2009
                
                
                2nd Quarter, 2009
                
                
                3rd Quarter, 2008
                
                
                2nd Quarter, 2008Interest
      bearing bank balances
                
                
                0.11
                %
                
                
                0.06
                %
                
                
                1.93
                %
                
                
                1.96
                %Federal
      funds sold
                
                
                0.22
                
                
                
                0.23
                
                
                
                1.61
                
                
                
                2.72Taxable
      investments
                
                
                3.82
                
                
                
                4.00
                
                
                
                5.04
                
                
                
                5.18Tax-exempt
      investments
                
                
                5.97
                
                
                
                6.01
                
                
                
                6.08
                
                
                
                6.21Loans
      held for sale
                
                
                4.13
                
                
                
                2.13
                
                
                
                3.68
                
                
                
                5.29Loans
      held for investment
                
                
                6.08
                
                
                
                5.72
                
                
                
                6.55
                
                
                
                6.86Earning
      asset yield
                
                
                5.45
                
                
                
                5.30
                
                
                
                6.32
                
                
                
                6.58Interest
      checking
                
                
                1.17
                
                
                
                1.42
                
                
                
                1.55
                
                
                
                1.49Money
      market deposits
                
                
                1.18
                
                
                
                1.33
                
                
                
                2.11
                
                
                
                2.33Savings
                
                
                1.41
                
                
                
                1.51
                
                
                
                2.11
                
                
                
                2.32Certificates
      of deposit
                
                
                2.80
                
                
                
                2.99
                
                
                
                3.42
                
                
                
                3.87Short-term
      borrowings
                
                
                0.82
                
                
                
                1.08
                
                
                
                2.25
                
                
                
                2.29Other
      borrowings
                
                
                4.41
                
                
                
                4.51
                
                
                
                4.61
                
                
                
                4.82Cost
      of interest-bearing liabilities
                
                
                2.32
                
                
                
                2.46
                
                
                
                2.95
                
                
                
                3.22Net
      interest spread
                
                
                3.13
                
                
                
                2.84
                
                
                
                3.37
                
                
                
                3.36Effect
      of non-interest bearing deposits
                
                
                .30
                
                
                
                .31
                
                
                
                .36
                
                
                
                .40Effect
      of leverage
                
                
                (.03
                )
                
                
                .01
                
                
                
                (.03
                )
                
                
                (.03
                )Net
      interest margin, tax-equivalent
                
                
                3.40
                
                
                
                3.16
                
                
                
                3.70
                
                
                
                3.73Less:
      Tax equivalent adjustments:Investments
                
                
                .08
                
                
                
                .09
                
                
                
                .09
                
                
                
                .09Loans
                
                
                .02
                
                
                
                .01
                
                
                
                .01
                
                
                
                .01Reported
      book net interest margin
                
                
                3.30
                %
                
                
                3.06
                %
                
                
                3.60
                %
                
                
                3.63
                %





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





Yields/CostsSeptember 2009
                        
                        
                        September 2008Interest
      bearing bank balances
                        
                        
                        0.12
                        %
                        
                        
                        2.58
                        %Federal
      funds sold
                        
                        
                        0.23
                        
                        
                        
                        2.94Taxable
      investments
                        
                        
                        4.18
                        
                        
                        
                        5.08Tax-exempt
      investments
                        
                        
                        6.02
                        
                        
                        
                        6.17Loans
      held for sale
                        
                        
                        3.31
                        
                        
                        
                        4.96Loans
      held for investment
                        
                        
                        5.94
                        
                        
                        
                        6.92Earning
      asset yield
                        
                        
                        5.46
                        
                        
                        
                        6.62Interest
      checking
                        
                        
                        1.32
                        
                        
                        
                        1.50Money
      market deposits
                        
                        
                        1.41
                        
                        
                        
                        2.38Savings
                        
                        
                        1.52
                        
                        
                        
                        2.39Certificates
      of deposit
                        
                        
                        2.94
                        
                        
                        
                        3.95Short-term
      borrowings
                        
                        
                        1.05
                        
                        
                        
                        2.45Other
      borrowings
                        
                        
                        4.51
                        
                        
                        
                        4.73Cost
      of interest-bearing liabilities
                        
                        
                        2.46
                        
                        
                        
                        3.29Net
      interest spread
                        
                        
                        3.00
                        
                        
                        
                        3.33Effect
      of non-interest bearing deposits
                        
                        
                        .31
                        
                        
                        
                        .40Effect
      of leverage
                        
                        
                        (.01
                        )
                        
                        
                        (.03
                        )Net
      interest margin, tax-equivalent
                        
                        
                        3.30
                        
                        
                        
                        3.70Less:
      Tax equivalent adjustments:Investments
                        
                        
                        .09
                        
                        
                        
                        .09Loans
                        
                        
                        .01
                        
                        
                        
                        .01Reported
      book net interest margin
                        
                        
                        3.20
                        %
                        
                        
                        3.60
                        %


38





FIRST M
& F CORPORATION





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





(Dollars
      in thousands)3rd Quarter, 2009
                
                
                2nd Quarter, 2009
                
                
                3rd Quarter, 2008
                
                
                2nd Quarter, 2008Interest
      bearing bank balances
                
                $
                14,850
                
                
                $
                9,339
                
                
                $
                3,228
                
                
                $
                5,627Federal
      funds sold
                
                
                41,032
                
                
                
                23,959
                
                
                
                2,400
                
                
                
                6,783Taxable
      investments
                
                
                260,003
                
                
                
                250,023
                
                
                
                171,936
                
                
                
                182,982Tax-exempt
      investments
                
                
                54,940
                
                
                
                57,091
                
                
                
                57,809
                
                
                
                56,376Loans
      held for sale
                
                
                7,235
                
                
                
                7,036
                
                
                
                4,986
                
                
                
                7,406Loans
      held for investment
                
                
                1,100,109
                
                
                
                1,131,370
                
                
                
                1,198,943
                
                
                
                1,193,703Earning
      assets
                
                
                1,478,169
                
                
                
                1,478,818
                
                
                
                1,439,302
                
                
                
                1,452,877Other
      assets
                
                
                168,541
                
                
                
                132,695
                
                
                
                159,911
                
                
                
                168,688Total
      assets
                
                $
                1,646,710
                
                
                $
                1,611,513
                
                
                $
                1,599,213
                
                
                $
                1,621,565Interest
      checking
                
                
                280,104
                
                
                
                280,952
                
                
                
                215,559
                
                
                
                211,590Money
      market deposits
                
                
                155,665
                
                
                
                172,014
                
                
                
                178,733
                
                
                
                186,740Savings
      deposits
                
                
                112,684
                
                
                
                113,799
                
                
                
                116,658
                
                
                
                116,720Certificates
      of deposit
                
                
                576,388
                
                
                
                552,134
                
                
                
                565,156
                
                
                
                582,841Short-term
      borrowings
                
                
                12,556
                
                
                
                9,013
                
                
                
                17,269
                
                
                
                17,693Other
      borrowings
                
                
                165,722
                
                
                
                157,054
                
                
                
                180,793
                
                
                
                171,600Interest-bearing
      liabilities
                
                
                1,303,119
                
                
                
                1,284,966
                
                
                
                1,274,168
                
                
                
                1,287,184Noninterest-bearing
      deposits
                
                
                190,917
                
                
                
                184,716
                
                
                
                177,595
                
                
                
                181,134Other
      liabilities
                
                
                17,309
                
                
                
                3,711
                
                
                
                7,117
                
                
                
                9,179Stockholders’
      equity
                
                
                135,365
                
                
                
                138,120
                
                
                
                140,333
                
                
                
                144,068Liabilities
      and stockholders’ equity
                
                $
                1,646,710
                
                
                $
                1,611,513
                
                
                $
                1,599,213
                
                
                $
                1,621,565Loans
      to earning assets
                
                
                74.42
                %
                
                
                76.51
                %
                
                
                83.30
                %
                
                
                82.16
                %Loans
      to assets
                
                
                66.81
                %
                
                
                70.80
                %
                
                
                74.97
                %
                
                
                73.61
                %Earning
      assets to assets
                
                
                89.76
                %
                
                
                91.77
                %
                
                
                90.00
                %
                
                
                89.60
                %Noninterest-bearing
      deposits to assets
                
                
                11.59
                %
                
                
                11.46
                %
                
                
                11.11
                %
                
                
                11.17
                %Equity
      to assets
                
                
                8.22
                %
                
                
                8.57
                %
                
                
                8.78
                %
                
                
                8.88
                %





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





(Dollars
      in thousands)September 2009
                      
                      
                      September 2008Interest
      bearing bank balances
                      
                      $
                      13,457
                      
                      
                      $
                      6,238Federal
      funds sold
                      
                      
                      36,589
                      
                      
                      
                      6,534Taxable
      investments
                      
                      
                      233,965
                      
                      
                      
                      181,080Tax-exempt
      investments
                      
                      
                      57,284
                      
                      
                      
                      55,450Loans
      held for sale
                      
                      
                      7,746
                      
                      
                      
                      6,493Loans
      held for investment
                      
                      
                      1,131,950
                      
                      
                      
                      1,201,912Earning
      assets
                      
                      
                      1,480,991
                      
                      
                      
                      1,457,707Other
      assets
                      
                      
                      153,606
                      
                      
                      
                      167,441Total
      assets
                      
                      $
                      1,634,597
                      
                      
                      $
                      1,625,148Interest
      checking
                      
                      
                      274,984
                      
                      
                      
                      209,949Money
      market deposits
                      
                      
                      166,746
                      
                      
                      
                      177,066Savings
      deposits
                      
                      
                      113,706
                      
                      
                      
                      115,123Certificates
      of deposit
                      
                      
                      567,377
                      
                      
                      
                      594,214Short-term
      borrowings
                      
                      
                      10,587
                      
                      
                      
                      14,105Other
      borrowings
                      
                      
                      166,264
                      
                      
                      
                      184,401Interest-bearing
      liabilities
                      
                      
                      1,299,664
                      
                      
                      
                      1,294,858Noninterest-bearing
      deposits
                      
                      
                      185,319
                      
                      
                      
                      179,622Other
      liabilities
                      
                      
                      8,464
                      
                      
                      
                      8,411Stockholders’
      equity
                      
                      
                      141,150
                      
                      
                      
                      142,257Liabilities
      and stockholders’ equity
                      
                      $
                      1,634,597
                      
                      
                      $
                      1,625,148Loans
      to earning assets
                      
                      
                      76.43
                      %
                      
                      
                      82.45
                      %Loans
      to assets
                      
                      
                      69.25
                      %
                      
                      
                      73.96
                      %Earning
      assets to assets
                      
                      
                      90.60
                      %
                      
                      
                      89.70
                      %Noninterest-bearing
      deposits to assets
                      
                      
                      11.34
                      %
                      
                      
                      11.05
                      %Equity
      to assets
                      
                      
                      8.64
                      %
                      
                      
                      8.75
                      %


39





FIRST M
& F CORPORATION





Provision
for Loan Losses





The
accrual for the provision for loan losses for the first nine months of 2009 was
$33.840 million as compared to $9.050 million for the first nine months of 2008.
Net charge offs were $26.063 million for the first nine months of 2009 as
compared to $3.649 million for the first nine months of 2008.





The
accrual for the provision for loan losses for the third quarter of 2009 was
$4.805 million as compared to $2.190 million for the third quarter of 2008. Net
charge-offs were $3.433 million for the third quarter of 2009 as compared to
$1.473 million for the third quarter of 2008. The allowance for loan losses as a
percentage of loans was 2.97% at September 30, 2009, 2.12% at December 31, 2008,
and 1.63% at September 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 nine months of 2009 was
$15.515 million as compared to $16.294 million for the same period in 2008. For
the first nine months of 2009 as compared to 2008: (1) deposit revenues
decreased by $627 thousand, (2) mortgage banking revenues increased by $414
thousand and (3) agency commissions decreased by $166 thousand.





Noninterest
income, excluding securities transactions, for the third quarter of 2009 was
$5.177 million as compared to $5.534 million for the same period in 2008 and
$5.150 million in the second quarter of 2009. For the third quarter of 2009 as
compared to the third quarter of 2008: (1) deposit revenues decreased by $238
thousand, (2) mortgage banking revenues increased by $79 thousand and (3) agency
commissions decreased by $56 thousand. For the third quarter of 2009 as compared
to the second quarter of 2009: (1) deposit revenues decreased by $8 thousand,
(2) mortgage banking revenues decreased by $124 thousand and (3) agency
commissions increased by $140 thousand.





The third
quarter of 2009 showed a decrease of 7.82% from the third quarter of 2008 and a
..28% decrease from the second quarter of 2009 in deposit revenues. Overdraft fee
revenues, which comprise approximately 65% of deposit revenues, decreased by
9.70% from the third quarter of 2008 to the third quarter of 2009 and increased
by 8.25% from the second quarter of 2009 to the third quarter of 2009. The
decline in the third quarter of 2009 from the third quarter of 2008 was due to
decreased item volumes as third quarter 2009 volumes were lower than third
quarter 2008 volumes by 9.70%. The increase in the third quarter of 2009 from
the second quarter of 2009 was due to increased item volumes as third quarter
2009 volumes were higher than second quarter 2009 volumes by 8.25%. 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 11.00% from the third quarter of 2008 to the third quarter of 2009
and decreased by 21.89% from the second quarter of 2009 to the third 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.


40





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
                
                
                Nine
      Months Ended(Dollars
      in thousands)
                
                September 30
                
                
                September 302009
                
                
                2008
                
                
                2009
                
                
                2008Service
      charge revenues
                
                $
                252
                
                
                $
                348
                
                
                $
                815
                
                
                $
                1,060Debit/ATM
      card revenues
                
                
                641
                
                
                
                577
                
                
                
                2,039
                
                
                
                1,659Overdraft
      fee revenues
                
                
                1,911
                
                
                
                2,117
                
                
                
                5,284
                
                
                
                6,046Service
      charges on deposit accounts
                
                $
                2,804
                
                
                $
                3,042
                
                
                $
                8,138
                
                
                $
                8,765





Mortgage
banking income increased by 20.31% from the third quarter of 2008 to the third
quarter of 2009 and decreased by 20.95% from the second quarter of 2009 to the
third quarter of 2009. Mortgage originations increased by 80.92% from the third
quarter of 2008 to the third quarter of 2009 and decreased by 27.91% from the
second quarter of 2009 to the third 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. Rates continued to slowly decrease during the
third quarter of 2009. 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. Refinancing activity slowed during the third quarter
of 2009 while home purchase activity improved. 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 normalized 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 4.86% from the third quarter of 2008 to the third
quarter of 2009 and increased by 14.63% from the second quarter of 2009 to the
third quarter of 2009. For the third quarter of 2009 as compared to the third
quarter of 2008, property and casualty commissions decreased by 4.22% while
annuity insurance commissions decreased by 98.19% and title insurance
commissions increased by 36.61%. Insurance commission revenues are expected to
be influenced by economic activity, as consumers and businesses alike are
reducing spending.





The
Company owns certain beneficial interests in collateralized debt obligations
that own bank trust preferred securities. These beneficial interests are tested
for impairment on a quarterly basis. Two of the beneficial interests, Trapeza I
and Trapeza V, have deferred their interest payments and were placed in
nonaccrual status during the second quarter of 2009. The Trapeza I beneficial
interest failed an impairment test at June 30, 2009 while the Trapeza V and MM
Community Funding IX beneficial interests failed impairment tests at September
30, 2009 due primarily to collateral defaults and the subordinate position of
the interests as compared to other senior securities in the CDOs. Management
determined that the credit-related portion of the second quarter Trapeza I
impairment was $175 thousand with the remaining impairment being $218 thousand.
The credit-related portions of the third quarter impairments were $168 thousand
for the Trapeza V beneficial interest and $69 thousand for the MM Community
Funding IX beneficial interest with the remaining impairments related to
non-credit factors being $500 thousand for the Trapeza V beneficial interest and
$494 thousand for the MM Community Funding IX beneficial interest. The credit
portion of the impairments totaling $412 thousand were classified as
other-than-temporary impairments and charged against earnings during the second
and third quarters of 2009 while the remaining $1.212 million
other-than-temporary impairments were charged to other comprehensive income on
the statement of condition.





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





As
      of September 30, 2009(Dollars
      in thousands)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Deferrals
      andMoody’s
                    
                    Number
      of
                    
                    
                    Defaults
      asBook
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    Credit
                    
                    Banks
      in
                    
                    
                    a
      Percent
                    
                    
                    ExcessName
      of Issuer
                    
                    Class
                    
                    Value
                    
                    
                    Value
                    
                    
                    Loss
                    
                    Rating
                    
                    Issuance
                    
                    
                    of
      Collateral
                    
                    
                    SubordinationTrapeza
      I 2002-1A
                    
                    C1
                    
                    $
                    575
                    
                    
                    $
                    278
                    
                    
                    $
                    297
                    
                    Ca
                    
                    
                    25
                    
                    
                    
                    42.23
                    %
                    
                    
                    0.00
                    %Trapeza
      II 2003-2A
                    
                    C1
                    
                    
                    1,260
                    
                    
                    
                    522
                    
                    
                    
                    738
                    
                    Caa2
                    
                    
                    40
                    
                    
                    
                    32.69
                    
                    
                    
                    3.30Tpref
      Funding II
                    
                    B
                    
                    
                    1,006
                    
                    
                    
                    465
                    
                    
                    
                    541
                    
                    Caa3
                    
                    
                    34
                    
                    
                    
                    22.64
                    
                    
                    
                    0.88Trapeza
      V 2003-5A
                    
                    C1
                    
                    
                    832
                    
                    
                    
                    332
                    
                    
                    
                    500
                    
                    Ca
                    
                    
                    44
                    
                    
                    
                    24.79
                    
                    
                    
                    0.00MM
      Community Funding IX
                    
                    B1
                    
                    
                    937
                    
                    
                    
                    443
                    
                    
                    
                    494
                    
                    Caa3
                    
                    
                    34
                    
                    
                    
                    32.34
                    
                    
                    
                    0.00$
                    4,610
                    
                    
                    $
                    2,040
                    
                    
                    $
                    2,570


41





FIRST M
& F CORPORATION





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





(Dollars
      in thousands)
                    
                    
                    3Q2009
                    
                    
                    
                    2Q2009
                    
                    
                    
                    3Q2008
                    
                    
                    
                    2Q2008Agency
      profit-sharing revenues
                    
                    $
                    -
                    
                    
                    $
                    8
                    
                    
                    $
                    -
                    
                    
                    $
                    6Loan
      fees
                    
                    
                    85
                    
                    
                    
                    111
                    
                    
                    
                    226
                    
                    
                    
                    113Gains
      on student loan sales
                    
                    
                    2
                    
                    
                    
                    32
                    
                    
                    
                    91
                    
                    
                    
                    88Loss
      on bankers bank stock
                    
                    
                    -
                    
                    
                    
                    (78
                    )
                    
                    
                    -
                    
                    
                    
                    -All
      other income
                    
                    
                    401
                    
                    
                    
                    333
                    
                    
                    
                    377
                    
                    
                    
                    458Total
      other income
                    
                    $
                    488
                    
                    
                    $
                    406
                    
                    
                    $
                    694
                    
                    
                    $
                    665





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
Company has a strategy to increase noninterest revenues as a proportion of total
revenues over time. Noninterest revenues as a percentage of total revenues
increased from 29.16% in the third quarter of 2008 to 29.81% in the third
quarter of 2009, and decreased from 29.92% in the second quarter of 2009 to
29.81% in the third quarter of 2009. Another metric that the Company monitors is
revenues per full-time employee, which were approximately $34 thousand per
employee for the third quarter of 2009 and $31 thousand per employee for the
second quarter of 2009 as compared to $34 thousand for the third quarter of 2008
and $33 thousand for the second quarter of 2008. Insurance product revenues per
producer remained fairly constant at $25 thousand per producer in the first nine
months of 2008 as compared to $25 thousand per producer in the first nine months
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.


42





FIRST M
& F CORPORATION





Non
Interest Expense





Noninterest
expenses increased by 6.89% from the third quarter of 2008 to the third quarter
of 2009 and decreased by 10.59% from the second quarter of 2009 to the third
quarter of 2009.





Salary
and benefit expenses, which comprise approximately 50% of noninterest expenses,
decreased by 1.72% from the third quarter of 2008 to the third quarter of 2009
and decreased by 2.63% from the second quarter of 2009 to the third quarter of
2009. The number of full-time equivalent employees was 523 at September 30,
2009, 529 at June 30, 2009, 548 at September 30, 2008, and 556 at June 30, 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 second and third quarters of
2009 and 2008 are contained in the following table:





(Dollars
      in thousands)
                
                
                3Q2009
                
                
                
                2Q2009
                
                
                
                3Q2008
                
                
                
                2Q2008Losses
      on sales of other real estate
                
                $
                37
                
                
                $
                428
                
                
                $
                105
                
                
                $
                119Write-downs
      of other real estate
                
                
                30
                
                
                
                893
                
                
                
                -
                
                
                
                334Other
      real estate expenses
                
                
                460
                
                
                
                217
                
                
                
                91
                
                
                
                79Rental
      income on other real estate properties
                
                
                (19
                )
                
                
                (12
                )
                
                
                (5
                )
                
                
                (5
                )Total
      foreclosed property expenses
                
                $
                508
                
                
                $
                1,526
                
                
                $
                191
                
                
                $
                527





FDIC
insurance assessments in 2009 increased significantly over the third quarter and
first nine months 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 3.29% in the
third quarter of 2008 to 3.41% in the third quarter of 2009, and decreased from
3.94% in the second quarter of 2009 to 3.41% in the third quarter of
2009.





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





(Dollars
      in thousands)
                
                
                3Q2009
                
                
                
                2Q2009
                
                
                
                3Q2008
                
                
                
                2Q2008Postage
      and shipping
                
                $
                236
                
                
                $
                223
                
                
                $
                237
                
                
                $
                228Supplies
                
                
                210
                
                
                
                198
                
                
                
                199
                
                
                
                194Legal
      expenses
                
                
                223
                
                
                
                288
                
                
                
                224
                
                
                
                197Other
      professional expenses
                
                
                197
                
                
                
                174
                
                
                
                127
                
                
                
                180Insurance
      expenses
                
                
                239
                
                
                
                82
                
                
                
                230
                
                
                
                110Debit
      card processing expenses
                
                
                157
                
                
                
                146
                
                
                
                184
                
                
                
                178All
      other expenses
                
                
                1,506
                
                
                
                1,565
                
                
                
                1,196
                
                
                
                1,219Total
      other expense
                
                $
                2,768
                
                
                $
                2,676
                
                
                $
                2,397
                
                
                $
                2,306


43





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.


44





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 notable change to the balance
sheet of the community banking unit 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 a treasury unit. This was
done since (1) the treasury area is almost exclusively used by the community
banking operations and (2) funding sources such as debentures that were issued
by the Company 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 using a weighted average of (1) a
market-based price, (2) a control-premium-based valuation and (3) a discounted
cash flow analysis. The market-based price was the most heavily weighted
valuation component because it involved the most directly observable data. The
market-based value of the Company was determined using historical deal prices
for community banks, adjusted for bank size and credit quality factors. The
valuation analysis resulted in a fair value of the community banking unit that
was less than the book value by approximately $17 million. In contrast, the
December 2008 test, based on discounted cash flow analysis, had resulted in a
fair value in excess of book value by approximately $6 million. Therefore, the
March 2009 test, with net assets of the community banking unit exceeding their
estimated fair value, required a second step assigning individual fair values to
identified assets and liabilities to determine if the goodwill asset was
impaired. After fair values were assigned to the identifiable assets and
liabilities, the residual amount that was assigned to goodwill, its implied fair
value, was approximately $15.800 million less than its book value. 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 and third
quarters of 2009 as it traded between a low of $2.66 per share and a high of
$7.99 per share. The stock price closed at $2.75 on September 30, 2009,
prompting management to revisit the goodwill impairment first step calculations
from the March 31, 2009 test. Based on updated data from third 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 September 30, 2009.
Therefore, the second step of the goodwill impairment test was not
required.





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.


45





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 nine
months of 2009. The $11.389 million tax benefit for 2009 includes a deferred tax
benefit of $4.398 million and a current tax benefit of $6.991 million. At
September 30, 2009, the Company had a current tax benefit receivable of $9.489
million and a deferred tax asset of $7.983 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
      as(Dollars
      in thousands)
                
                Loan Loss Accrual
                
                
                Effect
                
                
                Effect
                
                
                DisclosedNet
      income (loss) before tax
                
                $
                7,004
                
                
                $
                (17,048
                )
                
                $
                (33,840
                )
                
                $
                (43,884
                )Income
      taxes
                
                
                1,698
                
                
                
                (465
                )
                
                
                (12,622
                )
                
                
                (11,389
                )Net
      income (loss) before noncontrolling interests
                
                $
                5,306
                
                
                $
                (16,583
                )
                
                $
                (21,218
                )
                
                $
                (32,495
                )Effective
      tax rate before noncontrolling interests
                
                
                24.24
                %
                
                
                2.73
                %
                
                
                37.30
                %
                
                
                25.95
                %





Excluding
the effect of $1.617 million in tax-exempt securities income and $655 thousand
in non-taxable corporate-owned insurance revenues, the average tax rate for
earnings before impairments and loan loss accruals was 35.21%.





The
Company had no recognized uncertain tax positions as of September 30, 2008 or
2009 and therefore did not have any tax accruals during the first nine months of
2008 or 2009 related to uncertain positions.





Assets
and Liabilities





Assets
increased by 2.14% from September 30, 2008 to September 30, 2009, and increased
by 4.99% from December 31, 2008. Investments increased by 37.90% from September
30, 2008 to September 30, 2009, and increased by 33.53% from December 31, 2008.
The Company purchased $49.585 million in government agency securities and
$83.780 million in mortgage-backed and related securities during the first nine
months of 2009. Liquidity from mortgage-backed securities’ sales, deposit
growth, a reduction in the loan portfolio and funds received through the U. S.
Treasury CPP program was used to fund the purchases. Approximately $10.187
million of mortgage-backed securities were sold during the third quarter for a
gain of $449 thousand to take advantage of the improved pricing in the
mortgage-backed markets. Liquidity provided by deposit growth, maturities of
government-sponsored agencies and sales of small mortgage-backed securities
during the first nine months 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 nine
months of 2009 as the Company sought to remove problem real estate loans and
diversify into other areas. Consumer loans have grown steadily over the course
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 has being made on consumer
and small business commercial loans. Loans held to maturity decreased by 8.88%
from September 30, 2008 to September 30, 2009, and decreased by 6.59% 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 65.56% at September 30, 2009, 73.68% at December 31, 2008, and
73.49% at September 30, 2008.


46





FIRST M
& F CORPORATION





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





(Dollars in thousands)
                    
                    September 30, 2009
                    
                    
                    December 31, 2008
                    
                    
                    September 30, 2008Commercial
      real estate
                    
                    $
                    677,777
                    
                    
                    $
                    745,700
                    
                    
                    $
                    759,279Residential
      real estate
                    
                    
                    197,760
                    
                    
                    
                    209,696
                    
                    
                    
                    208,718Home
      equity lines
                    
                    
                    44,250
                    
                    
                    
                    45,791
                    
                    
                    
                    46,201Commercial,
      financial and agricultural
                    
                    
                    124,836
                    
                    
                    
                    127,704
                    
                    
                    
                    145,743Consumer
                    
                    
                    44,318
                    
                    
                    
                    37,908
                    
                    
                    
                    38,001Other
      loans
                    
                    
                    10,167
                    
                    
                    
                    9,796
                    
                    
                    
                    8,271Total
                    
                    $
                    1,099,108
                    
                    
                    $
                    1,176,595
                    
                    
                    $
                    1,206,213Mortgages
      held for sale
                    
                    $
                    2,255
                    
                    
                    $
                    3,803
                    
                    
                    $
                    2,783Student
      loans held for sale
                    
                    
                    4,471
                    
                    
                    
                    3,895
                    
                    
                    
                    2,683





Deposits
increased by 8.42% from September 30, 2008 to September 30, 2009, and increased
by 7.57% 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 September 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
                
                $
                5,350
                
                
                
                3.12
                %
                
                $
                12,960
                
                
                
                186.07
                %
                
                $
                18,310
                
                
                
                10.25
                %NOW
                
                
                24,020
                
                
                
                14.19
                
                
                
                52,949
                
                
                
                110.27
                
                
                
                76,969
                
                
                
                35.42MMDA
                
                
                (25,534
                )
                
                
                (16.06
                )
                
                
                (972
                )
                
                
                (4.15
                )
                
                
                (26,506
                )
                
                
                (14.53
                )Savings
                
                
                (1,733
                )
                
                
                (1.52
                )
                
                
                (178
                )
                
                
                (37.95
                )
                
                
                (1,911
                )
                
                
                (1.67
                )Customer
      CDs
                
                
                47,921
                
                
                
                10.51
                
                
                
                (16,267
                )
                
                
                (17.44
                )
                
                
                31,654
                
                
                
                5.76Brokered
      CDs
                
                
                (4,072
                )
                
                
                (23.91
                )
                
                
                986
                
                
                
                40.00
                
                
                
                (3,086
                )
                
                
                (15.83
                )Total
                
                $
                45,952
                
                
                
                4.23
                %
                
                $
                49,478
                
                
                
                28.34
                %
                
                $
                95,430
                
                
                
                7.57
                %





Interest-bearing
checking and certificate of deposit core customer deposits were up during the
first nine months of 2009. Core customer deposits grew by $45.952 million during
the first nine months of 2009 and by $8.317 million during the third quarter of
2009. Public funds, which are deposits of municipalities, grew by $49.478
million during the first nine months of 2009 and by $38.953 million during the
third quarter of 2009. The core customer growth for the third quarter of 2009
occurred primarily in noninterest-bearing deposits and certificates of deposit.
The public funds growth for the third quarter of 2009 occurred primarily in NOW
deposits and certificates of deposit. 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, increased by $4.746 million during the
second quarter and decreased by $577 thousand during the third quarter.
Certificates of deposit held by municipalities decreased during the first nine
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. 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.




47





FIRST M
& F CORPORATION





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





(Dollars in thousands)
                
                September 30, 2009
                
                
                December 31, 2008
                
                
                September 30, 2008Noninterest-bearing
      demand
                
                $
                196,999
                
                
                $
                178,689
                
                
                $
                178,980NOW
      deposits
                
                
                294,303
                
                
                
                217,334
                
                
                
                219,612Money
      market deposits
                
                
                155,858
                
                
                
                182,364
                
                
                
                176,199Savings
      deposits
                
                
                112,370
                
                
                
                114,281
                
                
                
                115,041Certificates
      of deposit
                
                
                580,878
                
                
                
                549,224
                
                
                
                544,605Brokered
      certificates of deposit
                
                
                16,409
                
                
                
                19,495
                
                
                
                17,026Total
                
                $
                1,356,817
                
                
                $
                1,261,387
                
                
                $
                1,251,463





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





(Dollars in thousands)
                
                September 30, 2009
                
                
                December 31, 2008
                
                
                September 30, 2008Noninterest-bearing
      demand
                
                $
                19,925
                
                
                $
                6,965
                
                
                $
                8,041NOW
      deposits
                
                
                100,968
                
                
                
                48,019
                
                
                
                54,948Money
      market deposits
                
                
                22,439
                
                
                
                23,411
                
                
                
                27,965Savings
      deposits
                
                
                291
                
                
                
                469
                
                
                
                394Certificates
      of deposit
                
                
                76,998
                
                
                
                93,265
                
                
                
                88,064Brokered
      certificates of deposit
                
                
                3,451
                
                
                
                2,465
                
                
                
                2,624Total
                
                $
                224,072
                
                
                $
                174,594
                
                
                $
                182,036





Other
borrowings decreased by $63.796 million from September 30, 2008 to September 30,
2009 and by $17.796 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 63.94% at September 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.




48





FIRST M
& F CORPORATION





Equity





The
Company’s and Bank’s regulatory capital ratios at September 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 nine months of 2008 at an
average price of $15.55 per share. The Company did not repurchase any shares
during the first nine months of 2009. The Company did not issue any shares upon
the exercise of stock options during the first nine 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 have served and will continue to serve as an excellent
source of insurance against the effects of further economic deterioration on the
Company’s capital and will also serve as a source of liquidity when prudent
lending opportunities arise.





The
Company’s shares, listed as FMFC on the NASDAQ Global Select Market, trade at
the rate of approximately 5,000 shares per day. The stock price was listed at
$2.75 on September 30, 2009.




49





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 September 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. As
part of this evaluation, individual loans are reviewed for impairment. Loans
with high risk grades, generally implying a substandard classification, are
selected for individual impairment tests. Loan grades are a significant
indicator in determining which loans to individually test for impairment because
the loan grading process incorporates past due status, payment history, customer
financial condition and collateral value in assigning individual grades to
loans. Nonaccrual loans are also generally selected for individual impairment
tests. 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.




50





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. Management has addressed the problem of liquidating
nonperforming loans by creating a special problem asset group within the
organization, separate from the ongoing credit operations and lending activities
of the Company. Problem loans, including large nonaccrual loans, have been
assigned to this group of specialists with the intent of liquidating the loans
or their collateral in an orderly fashion. Over the course of 2009 many real
estate-secured loans have been worked out or foreclosed on and properties
disposed of. This group will continue to work out problem loans and market
foreclosed other real estate for the foreseeable future.





Of the
$69.019 million in nonaccrual loans at September 30, approximately 77.40% were
in construction and development and commercial real estate loans. These
nonaccrual balances consisted of several large loans rather than a great many
small loans.





The
following table summarizes the changes in nonaccrual construction and land
development loans of $500 thousand or more from December 31, 2008 through
September 30, 2009.





(Dollars
      in thousands)Number of Loans
                
                
                AmountBalance
      at 12/31/08
                
                
                6
                
                
                $
                11,280Foreclosures
                
                
                (2
                )
                
                
                (3,151
                )Additions
                
                
                8
                
                
                
                20,985Balance
      at 03/31/09
                
                
                12
                
                
                
                29,114Foreclosures
                
                
                (5
                )
                
                
                (11,630
                )Additions
                
                
                14
                
                
                
                22,962Write
      downs to allowance for loan losses
                
                
                
                
                
                
                (3,514
                )Balance
      at 06/30/09
                
                
                21
                
                
                
                36,932Foreclosures
                
                
                (5
                )
                
                
                (9,057
                )Additions
                
                
                5
                
                
                
                9,571Net
      payment activity
                
                
                (1
                )
                
                
                (1,134
                )Write
      downs to allowance for loan losses
                
                
                
                
                
                
                (262
                )Balance
      at 09/30/09
                
                
                20
                
                
                $
                36,050





The
following table summarizes the changes in nonaccrual commercial real estate
loans of $500 thousand or more from December 31, 2008 through September 30,
2009.





(Dollars
      in thousands)Number of Loans
                  
                  
                  AmountBalance
      at 12/31/08
                  
                  
                  2
                  
                  
                  $
                  1,605Foreclosures
                  
                  
                  (1
                  )
                  
                  
                  (938
                  )Additions
                  
                  
                  2
                  
                  
                  
                  10,321Balance
      at 03/31/09
                  
                  
                  3
                  
                  
                  
                  10,988Additions
                  
                  
                  4
                  
                  
                  
                  6,938Net
      payment activity
                  
                  
                  (1
                  )
                  
                  
                  (545
                  )Write
      downs to allowance for loan losses
                  
                  
                  
                  
                  
                  
                  (67
                  )Balance
      at 06/30/09
                  
                  
                  6
                  
                  
                  
                  17,314Additions
                  
                  
                  4
                  
                  
                  
                  5,371Placed
      back into accrual status
                  
                  
                  (3
                  )
                  
                  
                  (15,074
                  )Net
      payment activity
                  
                  
                  
                  
                  
                  
                  (16
                  )Balance
      at 09/30/09
                  
                  
                  7
                  
                  
                  $
                  7,595




51





FIRST M
& F CORPORATION





The
following tables list construction and commercial real estate loans, along with
their impairment allowances, that were in non-accrual status and had significant
balances at September 30, 2009.





Ten Largest Construction and Land Development Loans*December 31, 2008
                
                
                June 30, 2009
                
                
                September 30, 2009(Dollars in thousands)
                
                Non-accrual
                
                
                Impairment
                
                
                Non-accrual
                
                
                Impairment
                
                
                Non-accrual
                
                
                ImpairmentNote, Collateral Location
                
                Balance
                
                
                Allowance
                
                
                Balance
                
                
                Allowance
                
                
                Balance
                
                
                Allowance1.
      Niceville, FL
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,080
                
                
                $
                3802.
      Perdido Key, FL
                
                
                3,578
                
                
                
                -
                
                
                
                3,578
                
                
                
                528
                
                
                
                3,578
                
                
                
                5283.
      Niceville, FL
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,055
                
                
                
                2054.
      Santa Rosa Beach, FL
                
                
                -
                
                
                
                680
                
                
                
                2,750
                
                
                
                -
                
                
                
                2,750
                
                
                
                -5.
      Oxford, MS
                
                
                -
                
                
                
                300
                
                
                
                2,500
                
                
                
                -
                
                
                
                2,500
                
                
                
                5406.
      Auburn, AL
                
                
                2,421
                
                
                
                620
                
                
                
                2,420
                
                
                
                1,020
                
                
                
                2,420
                
                
                
                1,0207.
      Madison, MS
                
                
                -
                
                
                
                -
                
                
                
                2,378
                
                
                
                -
                
                
                
                2,378
                
                
                
                6088.
      Bartlett, TN
                
                
                -
                
                
                
                1,337
                
                
                
                2,357
                
                
                
                1,577
                
                
                
                2,307
                
                
                
                1,2229.
      Desoto County, MS
                
                
                -
                
                
                
                1,299
                
                
                
                2,144
                
                
                
                1,299
                
                
                
                2,144
                
                
                
                1,29910.
      Madison, MS
                
                
                -
                
                
                
                -
                
                
                
                1,902
                
                
                
                142
                
                
                
                1,902
                
                
                
                142Totals
                
                $
                5,999
                
                
                $
                4,236
                
                
                $
                20,029
                
                
                $
                4,566
                
                
                $
                27,114
                
                
                $
                5,944





Four Largest Commercial Real Estate Loans*December 31, 2008
                
                
                June 30, 2009
                
                
                September 30, 2009(Dollars in thousands)
                
                Non-accrual
                
                
                Impairment
                
                
                Non-accrual
                
                
                Impairment
                
                
                Non-accrual
                
                
                ImpairmentNote, Collateral Location
                
                Balance
                
                
                Allowance
                
                
                Balance
                
                
                Allowance
                
                
                Balance
                
                
                Allowance11.
      Niceville, FL
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,894
                
                
                $
                -12.
      Memphis, TN
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,678
                
                
                
                -13.
      Memphis, TN
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                128
                
                
                
                943
                
                
                
                14314.
      Memphis, TN
                
                
                -
                
                
                
                -
                
                
                
                924
                
                
                
                151
                
                
                
                924
                
                
                
                149Totals
                
                $
                -
                
                
                $
                -
                
                
                $
                924
                
                
                $
                279
                
                
                $
                5,439
                
                
                $
                292





* Periods
that show an allowance for a line item but no non-accrual balance indicate that
the loan was in an accruing status at that point.




52





FIRST M
& F CORPORATION





The
following table summarizes information relevant to the impairment determinations
for the ten largest construction and development loans and the four largest
commercial real estate loans that were in non-accrual status at September 30,
2009.





Non-accrual
                                                            
                                                            
                                                            Impairment
                                                            
                                                            Information(Dollars in thousands)
                                                            
                                                            Type of
                                                            
                                                            Type of
                                                            
                                                            Balance
                                                            
                                                            
                                                            Allowance
                                                            
                                                            SupportingNote, Collateral Location
                                                            
                                                            Borrower
                                                            
                                                            Collateral
                                                            
                                                            09/30/09
                                                            
                                                            
                                                            09/30/09
                                                            
                                                            Allowance1.
      Niceville, FL
                                                            
                                                            Commercial
      Developer
                                                            
                                                            Commercial
                                                            
                                                            $
                                                            4,080
                                                            
                                                            
                                                            $
                                                            330
                                                            
                                                            Appraisal
      dated 08/14/092.
      Perdido Key, FL
                                                            
                                                            Commercial
      Developer
                                                            
                                                            Commercial
      Land
                                                            
                                                            
                                                            3,578
                                                            
                                                            
                                                            
                                                            528
                                                            
                                                            Appraisal
      dated 02/11/093.
      Niceville, FL
                                                            
                                                            Commercial
      Developer
                                                            
                                                            Commercial
      Land
                                                            
                                                            
                                                            3,055
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            Appraisal
      dated 02/17/094.
      Santa Rosa Beach, FL
                                                            
                                                            Residential
      Developer
                                                            
                                                            Subdivision
                                                            
                                                            
                                                            2,750
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            Appraisal
      dated 07/21/085.
      Oxford, MS
                                                            
                                                            Residential
      Developer
                                                            
                                                            Condominium
                                                            
                                                            
                                                            2,500
                                                            
                                                            
                                                            
                                                            540
                                                            
                                                            Appraisal
      dated 06/01/096.
      Auburn, AL
                                                            
                                                            Commercial
      Developer
                                                            
                                                            Commercial
                                                            
                                                            
                                                            2,420
                                                            
                                                            
                                                            
                                                            1,020
                                                            
                                                            Appraisal
      dated 10/03/087.
      Madison, MS
                                                            
                                                            Residential
      Developer
                                                            
                                                            Vacant
      Land
                                                            
                                                            
                                                            2,378
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            Appraisal
      dated 09/21/098.
      Bartlett, TN
                                                            
                                                            Residential
      Developer
                                                            
                                                            Subdivision
                                                            
                                                            
                                                            2,307
                                                            
                                                            
                                                            
                                                            1,577
                                                            
                                                            Appraisal
      dated 03/04/099.
      Desoto County,  MS
                                                            
                                                            Residential
      Developer
                                                            
                                                            Subdivision
                                                            
                                                            
                                                            2,144
                                                            
                                                            
                                                            
                                                            1,299
                                                            
                                                            Appraisal
      dated 09/17/0810.
      Madison, MS
                                                            
                                                            Residential
      Developer
                                                            
                                                            Subdivision
                                                            
                                                            
                                                            1,902
                                                            
                                                            
                                                            
                                                            142
                                                            
                                                            Appraisal
      dated 12/17/0811.
      Niceville, FL
                                                            
                                                            Commercial
                                                            
                                                            Commercial
                                                            
                                                            
                                                            1,894
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            Appraisal
      dated 10/28/0812.
      Memphis, TN
                                                            
                                                            Commercial
                                                            
                                                            Retail
      Store
                                                            
                                                            
                                                            1,678
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            Appraisal
      dated 03/03/0913.
      Memphis, TN
                                                            
                                                            Commercial
                                                            
                                                            Commercial
                                                            
                                                            
                                                            943
                                                            
                                                            
                                                            
                                                            128
                                                            
                                                            Appraisal
      dated 03/02/0914.
      Memphis, TN
                                                            
                                                            Commercial
                                                            
                                                            Commercial
                                                            
                                                            
                                                            924
                                                            
                                                            
                                                            
                                                            151
                                                            
                                                            Appraisal
      dated
03/02/09





Through
2007 and into 2008 the majority of loans that were individually reviewed for
impairment were in accrual status but had risk ratings that indicated potential
or actual impairment. Toward the end of 2008 and into the first quarter of 2009
many of these loans required an impairment allowance and also were placed into
non-accrual status. The additions to the impairment allowance and the
non-accrual loan balances in 2009 occurred primarily in construction and land
development loans.





The
following table shows a distribution of the totals for construction loans
evaluated for impairment and the impairment allowances allocated to those loans
at December 31, 2008 and September 30, 2009.





December 31, 2008
                
                
                September 30, 2009(Dollars in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                13,724
                
                
                $
                1,483
                
                
                $
                44,447
                
                
                $
                7,078Accruing
      loans with an allowance
                
                
                38,302
                
                
                
                9,956
                
                
                
                21,176
                
                
                
                6,593Accruing
      loans without an allowance
                
                
                16,320
                
                
                
                -
                
                
                
                11,727
                
                
                
                -Total
                
                $
                68,346
                
                
                $
                11,439
                
                
                $
                77,350
                
                
                $
                13,671





The
following table shows a distribution of the totals for commercial real estate
loans evaluated for impairment and the impairment allowances allocated to those
loans at December 31, 2008 and September 30, 2009.





December 31, 2008
                
                
                September 30, 2009(Dollars in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                2,575
                
                
                $
                255
                
                
                $
                8,976
                
                
                $
                364Accruing
      loans with an allowance
                
                
                10,009
                
                
                
                505
                
                
                
                12,562
                
                
                
                1,878Accruing
      loans without an allowance
                
                
                2,106
                
                
                
                -
                
                
                
                23,810
                
                
                
                -Total
                
                $
                14,690
                
                
                $
                760
                
                
                $
                45,348
                
                
                $
                2,242




53





FIRST M
& F CORPORATION





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





Past Due
                  
                  
                  Past Due30 – 89
                  
                  
                  90 DaysDays
                  
                  
                  Or More
                  
                  
                  
                  
                  
                  Year-To-(Dollars in thousands)
                  
                  Outstanding
                  
                  
                  And Still
                  
                  
                  And Still
                  
                  
                  
                  
                  
                  Date NetBalances
                  
                  
                  Accruing
                  
                  
                  Accruing
                  
                  
                  Nonaccrual
                  
                  
                  Charge-OffsConstruction
      and development loans:09/30/09
                  
                  $
                  187,559
                  
                  
                  $
                  6,124
                  
                  
                  $
                  4,750
                  
                  
                  $
                  44,447
                  
                  
                  $
                  20,39506/30/09
                  
                  
                  208,956
                  
                  
                  
                  18,060
                  
                  
                  
                  1,750
                  
                  
                  
                  44,393
                  
                  
                  
                  18,37812/31/08
                  
                  
                  255,655
                  
                  
                  
                  13,216
                  
                  
                  
                  3,227
                  
                  
                  
                  13,724
                  
                  
                  
                  3,99909/30/08
                  
                  
                  285,152
                  
                  
                  
                  11,973
                  
                  
                  
                  -
                  
                  
                  
                  15,209
                  
                  
                  
                  525Loans
      secured by 1-4 family properties:09/30/09
                  
                  $
                  244,265
                  
                  
                  $
                  3,930
                  
                  
                  $
                  263
                  
                  
                  $
                  5,555
                  
                  
                  $
                  2,40806/30/09
                  
                  
                  249,895
                  
                  
                  
                  4,106
                  
                  
                  
                  72
                  
                  
                  
                  6,227
                  
                  
                  
                  1,68412/31/08
                  
                  
                  255,487
                  
                  
                  
                  5,819
                  
                  
                  
                  667
                  
                  
                  
                  2,725
                  
                  
                  
                  1,90109/30/08
                  
                  
                  257,701
                  
                  
                  
                  3,555
                  
                  
                  
                  80
                  
                  
                  
                  2,282
                  
                  
                  
                  1,133Commercial
      real estate-secured loans:09/30/09
                  
                  $
                  410,093
                  
                  
                  $
                  10,110
                  
                  
                  $
                  317
                  
                  
                  $
                  8,976
                  
                  
                  $
                  22006/30/09
                  
                  
                  390,813
                  
                  
                  
                  11,068
                  
                  
                  
                  379
                  
                  
                  
                  18,409
                  
                  
                  
                  19012/31/08
                  
                  
                  406,886
                  
                  
                  
                  3,149
                  
                  
                  
                  553
                  
                  
                  
                  2,575
                  
                  
                  
                  88309/30/08
                  
                  
                  382,843
                  
                  
                  
                  2,454
                  
                  
                  
                  342
                  
                  
                  
                  2,913
                  
                  
                  
                  451




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





(Dollars in thousands)
                  
                  September 30
                  
                  
                  December 31
                  
                  
                  September 302009
                  
                  
                  2008
                  
                  
                  2008Nonaccrual
      loans
                  
                  $
                  69,019
                  
                  
                  $
                  20,564
                  
                  
                  $
                  22,095Other
      real estate
                  
                  
                  28,114
                  
                  
                  
                  11,061
                  
                  
                  
                  7,191Investment
      securities
                  
                  
                  610
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      non-performing assets
                  
                  $
                  97,743
                  
                  
                  $
                  31,625
                  
                  
                  $
                  29,286Past
      due 90 days or more and stillaccruing
      interest
                  
                  $
                  6,351
                  
                  
                  $
                  5,686
                  
                  
                  $
                  634Restructured
      loans (accruing)
                  
                  
                  3,664
                  
                  
                  
                  3,664
                  
                  
                  
                  -Ratios:Nonaccrual
      loans to loans
                  
                  
                  6.24
                  %
                  
                  
                  1.74
                  %
                  
                  
                  1.82
                  %Past
      due 90 day loans to loans
                  
                  
                  .57
                  %
                  
                  
                  .48
                  %
                  
                  
                  .05
                  %Non-performing
      credit assets to loans and other real estate
                  
                  
                  8.57
                  %
                  
                  
                  2.65
                  %
                  
                  
                  2.40
                  %Non-performing
      assets to assets
                  
                  
                  5.83
                  %
                  
                  
                  1.98
                  %
                  
                  
                  1.78
                  %





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





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




54





FIRST M
& F CORPORATION




Off-Balance
Sheet Arrangements





The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At September 30, 2009, the Company
had $149.696 million in unused loan commitments outstanding. Of these
commitments, $103.505 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 September 30, 2009, the Company had $6.551 million in financial
standby letters of credit issued and outstanding.





At
September 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 $37 thousand at September 30, 2009 and $162 thousand at September 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
$5.130 million at September 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 September 30, 2009, mortgage origination-related
derivatives with positive fair values of $8 thousand were included in other
assets and derivatives with negative fair values of $6 thousand were included in
other liabilities.





The
Company also engages in forward sales contracts with mortgage investors to
purchase mortgages held for sale. Those forward sale agreements that have a
determined price and expiration date are accounted for as derivatives and marked
to fair value through mortgage banking income. At September 30, 2009, the
Company had $3.146 million in locked forward sales agreements in place. At
September 30, 2009, forward sale-related derivatives with positive fair values
of $2 thousand were included in other assets and derivatives with negative fair
values of $5 thousand were included in other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. There
were $5.041 million of sold mortgages that were still in the recourse period as
of September 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.




55





FIRST M
& F CORPORATION





Critical
Accounting Policies





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





Allowance
for loan losses





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





Management
of the Company evaluates many factors in determining the estimate for the
allowance for loan losses. Management reviews loan quality on an ongoing basis
to determine the 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.





Fair
Value





Certain
of the Company’s assets and liabilities are financial instruments carried at
fair value. This includes securities available for sale and mortgage-related
derivatives. Most of the assets and liabilities carried at fair value are based
on either quoted market prices, market prices for similar instruments or market
data for the instruments being valued. At September 30, 2009, less than 1% of
assets measured at fair value were based on significant unobservable
inputs.





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





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




56





FIRST M
& F CORPORATION





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





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.


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FIRST M
& F CORPORATION




Accounting
Pronouncements





Accounting Standards
Codification. The Financial Accounting Standards Board’s (FASB)
Accounting Standards Codification (ASC) became effective on July 1, 2009.
At that date, the ASC became FASB’s officially recognized source of
authoritative U.S. generally accepted accounting principles (GAAP) applicable to
all public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF) and related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the away companies refer to
U.S. GAAP in financial statements and accounting policies. Citing particular
content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure. Adoption of the
change to the codification did not have a material impact on the Company’s
financial statements.





FASB ASC Topic 260, “Earnings Per
Share.”On January 1, 2009, the Company adopted new authoritative
accounting guidance under FASB ASC Topic 260, “Earnings Per Share,” which
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 Company restated prior period
earnings per share through the retrospective application of this guidance. The
adoption of this new guidance did not have a material impact on the Company’s
financial statements.





FASB ASC Topic 320, “Investments -
Debt and Equity Securities.” New authoritative accounting guidance under
ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changes
existing guidance for determining whether an impairment is other than temporary
to debt securities and (ii) 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 ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale 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. The amount of the
impairment related to other factors is recognized in other comprehensive income.
The Company adopted the provisions of the new authoritative accounting guidance
under ASC Topic 320 during the second quarter of 2009. Adoption of the new
guidance did not significantly impact the Company’s financial
statements.





FASB ASC Topic 715, “Compensation -
Retirement Benefits.”New authoritative accounting guidance under ASC
Topic 715, “Compensation - Retirement Benefits,” provides guidance related to an
employer’s disclosures about plan assets of defined benefit pension or other
post-retirement benefit plans. Under ASC Topic 715, disclosures should provide
users of financial statements with an understanding of how investment allocation
decisions are made, the factors that are pertinent to an understanding of
investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets,
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk
within plan assets. The disclosures required by ASC Topic 715 will be included
in the Company’s financial statements beginning with the financial statements
for the year-ended December 31, 2009.





FASB ASC Topic 805, “Business
Combinations.” On January 1, 2009, new authoritative accounting
guidance under ASC Topic 805, “Business Combinations,” became applicable to the
Company’s accounting for business combinations closing on or after
January 1, 2009. ASC Topic 805 applies to all transactions and other events
in which one entity obtains control over one or more other businesses. ASC Topic
805 requires an acquirer, upon initially obtaining control of another entity, to
recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. ASC Topic 805 requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to 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 ASC Topic
450, “Contingencies.” Under ASC Topic 805, the requirements of ASC Topic 420,
“Exit or Disposal Cost Obligations,” would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of ASC Topic 450,
“Contingencies.”


58





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& F CORPORATION




FASB ASC Topic 810,
“Consolidation.” New authoritative accounting guidance under ASC Topic
810, “Consolidation,” amended prior guidance to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, ASC Topic 810 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. The new
authoritative accounting guidance under ASC Topic 810 became effective for the
Company on January 1, 2009 and did not have a significant impact on the
Company’s financial statements.





Further
new authoritative accounting guidance under ASC Topic 810 amends prior guidance
to change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. The new authoritative accounting
guidance 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 affect on the entity’s financial
statements. The new authoritative accounting guidance under ASC Topic 810 will
be effective January 1, 2010 and is not expected to have a significant
impact on the Company’s financial statements.





FASB ASC Topic 815, “Derivatives and
Hedging.” New authoritative accounting guidance under ASC Topic 815,
“Derivatives and Hedging,” amends prior guidance to amend and expand the
disclosure requirements for derivatives and hedging activities to provide
greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under ASC Topic 815, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, results of
operations and cash flows. To meet those objectives, the new authoritative
accounting guidance requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. The new
authoritative accounting guidance under ASC Topic 815 became effective for the
Company on January 1, 2009 and the required disclosures are reported in
Note 3 – Investment Securities and Derivatives.





FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.”New authoritative accounting guidance
under ASC Topic 820,”Fair Value Measurements and Disclosures,” 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. ASC Topic 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. The Company adopted the new authoritative accounting guidance
under ASC Topic 820 during the second quarter of 2009. Adoption of the new
guidance did not significantly impact the Company’s financial
statements.





Further
new authoritative accounting guidance (Accounting Standards Update
No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair
value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when
traded as an asset, (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (iii) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as an
income approach or market approach. The new authoritative accounting guidance
also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The forgoing new authoritative accounting guidance under ASC Topic
820 will be effective for the Company’s financial statements beginning
October 1, 2009 and is not expected to have a significant impact on the
Company’s financial statements.





FASB ASC Topic 825 “Financial
Instruments.” New authoritative accounting guidance under ASC Topic
825,”Financial Instruments,” requires an entity to provide disclosures about the
fair value of financial instruments in interim financial information and amends
prior guidance to require those disclosures in summarized financial information
at interim reporting periods. The new interim disclosures required under Topic
825 are included in Note 2 - Fair Value.




59





FIRST M
& F CORPORATION




FASB ASC Topic 855, “Subsequent
Events.” New authoritative accounting guidance under ASC Topic 855,
“Subsequent Events,” 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. ASC Topic 855 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. The new authoritative accounting
guidance under ASC Topic 855 became effective for the Company’s financial
statements for periods ending after June 15, 2009 and did not have a
significant impact on the Company’s financial statements.




FASB ASC Topic 860, “Transfers and
Servicing.”New authoritative accounting guidance under ASC Topic 860,
“Transfers and Servicing,” amends prior accounting guidance to enhance reporting
about transfers of financial assets, including securitizations, and where
companies have continuing exposure to the risks related to transferred financial
assets. The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.





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 0.20% increase over
12 months in its net interest income with a gradual (12 month ramp) and
sustained 100 basis point decrease in interest rates. A gradual and sustained
increase in interest rates of 200 basis points will result in a 1.75% increase
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 increase by 0.90% with an
immediate and sustained increase in interest rates of 200 basis points. The
market value of equity will decrease by 5.60% with an immediate and sustained
decrease in interest rates of 100 basis points.





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


60





FIRST M
& F CORPORATION





Item
4 - Controls and Procedures





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





As of
September 30, 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 September 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.


61





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





None





Item
5 – Other Information





None.


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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.




63





FIRST M
& F CORPORATION





SIGNATURES





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





FIRST M
& F CORPORATION








Date :
November 9, 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




64





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.




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