UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549





FORM
10-K




x
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009Oro
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from __________ to __________




Commission
File Number 000-09424





FIRST M&F
CORPORATION


(Exact
name of registrant as specified in its charter)





MISSISSIPPI
                    64-0636653(State
      or other jurisdiction of
                    (I.R.S.
      Employer Identification No.)incorporation
      or organization)134 West Washington Street,  Kosciusko,
      Mississippi
                    39090(Address
      of principal executive offices)
                    (Zip
      Code)





Registrant’s
telephone number, including area code:  662-289-5121





Securities
registered under Section 12(b) of the Act:





Common Stock, $5 par value
                  The NASDAQ Stock Market
  LLC(Title
      of each class)
                  (Name
      of each exchange on which
registered)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    o
Yes   x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  o
Yes   x No





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 periods 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   o No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    o
Yes     o No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   o





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





Large
      accelerated filer o
              
              Accelerated
      filer o
              
              Non-accelerated
      filer x
              
              Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   o
Yes    x No





Based on
the closing sale price for shares on June 30, 2009, the aggregate market value
of the voting and non-voting common stock held by non-affiliates
of the registrant was $27,721,897.





Indicate
the number of shares outstanding of each of the Registrant’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 January 31,
2010





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement dated March 17, 2010, are incorporated by reference into
Part III of the Form 10-K report.








FIRST
M&F CORPORATION AND SUBSIDIARY





CROSS
      REFERENCE INDEXPagePART
      IItem
      1
                Business
                3Item
      1A
                Risk
      Factors
                12Item
      1B
                Unresolved
      Staff Comments
                14Item
      2
                Properties
                14Item
      3
                Legal
      Proceedings
                14Item
      4
                ReservedPART
      IIItem
      5
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                15Item
      6
                Selected
      Financial Data
                18Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                19Item
      7A
                Quantitative
      and Qualitative Disclosures About Market Risk
                47Item
      8
                Financial
      Statements and Supplementary Data
                48Item
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                99Item
      9A(T)
                Controls
      and Procedures
                99Item
      9B
                Other
      Information
                99PART
      IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                100Item
      11
                Executive
      Compensation
                100Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                100Item
      13
                Certain
      Relationships and Related Transactions and Director
      Independence
                100Item
      14
                Principal
      Accounting Fees and Services
                100PART
      IVItem
      15
                Exhibits
                101





*Information
called for by Part III (Items 10 through 14) is incorporated by reference to the
Registrant’s Proxy Statement.


2





FIRST
M&F CORPORATION AND SUBSIDIARY





PART
I





BUSINESS





General





First
M&F Corporation (the Company) is a one-bank holding company chartered and
organized under Mississippi laws in 1979. The Company engages exclusively in the
banking business through its wholly-owned subsidiary, Merchants and Farmers Bank
of Kosciusko (the Bank) in the states of Mississippi, Tennessee, Alabama, and
Florida.





The Bank
was chartered and organized under the laws of the State of Mississippi in 1890,
and accounts for substantially all of the total assets and revenues of the
Company.  The Bank is the seventh largest bank in the state, having total
assets of approximately $1.661 billion at December 31, 2009. The Bank offers a
complete range of commercial and consumer services at its main office and two
branches in Kosciusko and its branches within central and north Mississippi,
including Ackerman, Brandon, Bruce, Canton, Cleveland, Clinton, Durant, Flowood,
Grenada, Jackson, Madison, Olive Branch, Oxford, Pearl, Philadelphia, Ridgeland,
Southaven, Starkville, and Tupelo. The Bank also has banking locations in
southwest Tennessee in Bells, Cordova, Germantown and Memphis. The Bank also has
banking locations in central Alabama in Birmingham, Chelsea, Columbiana,
Inverness, Pelham and Wilsonville. The Bank also has a banking location in
Niceville, Florida.





The Bank
has six wholly-owned subsidiaries: M&F Financial Services, Inc., which is
currently inactive; First M&F Insurance Company, Inc., a credit life
insurance company; M&F Insurance Agency, Inc., a general insurance agency;
M&F Insurance Group, Inc., a general insurance agency; Merchants and Farmers
Bank Securities Corporation, a real estate property management company; and
M&F Business Credit, Inc., an asset-based lending operation based in
Memphis, Tennessee.  The Bank owns 55% of MS Statewide Title, LLC, a title
insurance agency. The remaining 45% ownership is held by unaffiliated
parties.





The
banking system offers a variety of deposit, investment and credit products to
customers. The Bank provides these services to middle market and professional
businesses, ranging from business checking, treasury management services and
secured and unsecured lines of credit. Additional services include ACH
origination, sweep accounts and letters of credit. The Bank also offers a
variety of checking accounts to its customers and other services, which include
debit cards and automated teller machine access through several networks, and an
overdraft protection plan. Trust services are offered through the Kosciusko and
Madison offices in Mississippi and discount brokerage services are offered
through the Madison and Tupelo offices in Mississippi.





As of
December 31, 2009, the Company and its subsidiary employed 512 full-time
equivalent employees.





Cautionary
Statement Pursuant to the Private Securities Litigation Reform Act of
1995





Certain
of the information included in these discussions 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.
Specifically, these discussions include statements with respect to the adequacy
of the allowance for loan losses, the effect of legal proceedings against the
Company’s financial condition, results of operations and liquidity, and market
risk disclosures. Should one or more of these risks materialize or the
assumptions prove to be significantly different, actual results may vary from
those estimated, anticipated, projected or expected.


3





FIRST
M&F CORPORATION AND SUBSIDIARY





Overview





In the
opinion of First M&F Corporation’s management, the Company’s highlights
during 2009 were as follows:





Facilities





·
            In
      February 2009 closed a full service branch in Collierville,
      Tennessee


·
            In
      October 2009 closed a full service branch in Southaven,
      Mississippi


·
            In
      October 2009 closed a limited service branch in Philadelphia,
      Mississippi


·
            In
      October 2009 closed a full service branch in Starkville,
      Mississippi


·
            In
      December 2009 closed a full service branch in Crestview,
      Florida





Earnings





·
            Return
      on assets for 2009 was (3.63)% while the return on equity was (42.97)%.
      Return on assets for 2008 was .03% while the return on equity was
      .37%


·
            Debit
      card revenues grew by 13.47%, composing 22.94% of deposit
      revenues


·
            Mortgage
      banking revenues increased by 51.66% in 2009 after decreasing by 19.38% in
      2008


·
            Mortgage
      originations were $97.7 million in 2009 as compared to $62.4 million in
      2008


·
            Property,
      casualty, life and health insurance commissions decreased from $3.95
      million to $3.81 million





Credit





·
            Loans
      held for investment decreased by 10.05% in 2009 due to the general
      economic slowdown as loan demand decreased and problem loans
      increased


·
            Net
      charge offs, as a percentage of average loans, were 4.50% for 2009
      compared to .75% for 2008


·
            Nonaccrual
      loans as a percentage of loans increased to 4.17% at the end of 2009 from
      1.74% at the end of 2008


·
            90
      day past due accruing loans as a percentage of loans decreased to .23% at
      the end of 2009 from .48% at the end of
2008


·
            Foreclosed
      real estate balances were $23.578 million at the end of 2009 as compared
      to $11.061 million at the end of
2008


·
            Expenses
      related to foreclosed properties were $1.505 million in 2009 while losses
      incurred on foreclosed properties through sales and write-downs were
      $5.778 million as compared to expenses of $537 thousand and losses of
      $1.376 million in 2008





Other





·
            Assets
      grew by 4.14% during 2009 funded primarily by deposit
    growth


·
            Deposits
      grew by $126.876 million in 2009, with most of the growth occurring in
      noninterest-bearing and interest-bearing checking
  accounts


·
            The
      Company remained well capitalized with a total risk-based capital ratio of
      11.09% at the end of 2009 and 11.21% at the end of
  2008


·
            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





In the
opinion of Management, the challenges and opportunities facing the Company going
forward from December 31, 2009, are as follows:





·
            Continue
      to strengthen credit monitoring systems to provide proactive credit
      solutions


·
            Continue
      to work on sales of real estate owned as well as to work with customers to
      dispose of real estate collateral and manage the level of nonperforming
      loans downward


·
            Build
      the capital strength and funding flexibility of the
      organization


·
            Continue
      to build core deposits around strong products like Summit Checking that
      provide a base upon which a portfolio of financial services can be
      provided


·
            Continue
      to diversify the loan portfolio into consumer and commercial loans that
      are not real estate dependent


·
            Continue
      to increase the volumes and improve the products and services delivered
      through the insurance agencies and focus on branch referrals to enhance
      agency business


·
            Continue
      to build the retail investment brokerage
  business


·
            Use
      cost-saving initiatives to reduce expenses in current
      operations


·
            Promote
      low-cost delivery channels such as debit cards and electronic banking that
      are convenient to customers


·
            Continue
      developing customer-friendly technologies such as deposit image capture
      for commercial customers, emailing of statements, enhanced internet
      banking capabilities and mobile
banking


·
            Encourage
      customer use of more efficient technologies over labor-intensive processes
      by tying rates and benefits of deposit products to the use of internet and
      technology-based applications


4





FIRST
M&F CORPORATION AND SUBSIDIARY





Competition





The
Company competes generally with other banking institutions, savings
associations, credit unions, mortgage banking firms, consumer finance companies,
mutual funds, insurance companies, securities brokerage firms, and other finance
related institutions; many of which have greater resources than those available
to the Company. The competition relates primarily to interest rates, the
availability and quality of services and products, and the pricing of those
services and products. The Company’s philosophy is that of a community bank in
which personal service is of primary importance, and which promotes that
philosophy in competing against the larger regional financial services companies
which tend to depend on their vast array of products rather than individual
service.





Supervision
and Regulation





As a bank
holding company, First M&F Corporation is subject to regulation under the
Bank Holding Company Act of 1956, as amended, (the "BHCA") and the examination
and reporting requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board").  Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially all of the assets of any bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board.  The BHCA also generally limits the activities
of a bank holding company to that of banking, managing or controlling banks, or
any other activity which is determined to be so closely related to banking or
managing or controlling banks that an exception is allowed for those
activities.





As a
state-chartered commercial bank, Merchants and Farmers Bank, First M&F
Corporation's banking subsidiary, is subject to regulation, supervision and
examination by the Mississippi Department of Banking and Consumer Finance.
Merchants and Farmers Bank (the "Bank") is also subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). State and Federal law also govern the activities in which the Bank
engages, the investments it makes and the aggregate amount of loans that may be
granted to one borrower.  The insurance company subsidiary of the Bank is
also regulated and examined by the Insurance Department of the State of
Mississippi.





The
earnings of the Bank and its subsidiaries are affected by general economic
conditions, management policies, changes in state and Federal legislation and
actions of various regulatory authorities, including those referred to above.
The following description summarizes the significant state and Federal laws to
which the Company, the Bank and subsidiaries are subject.





USA
Patriot Act





In 2001,
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into
law. The USA Patriot Act broadened the application of anti-money laundering
regulations to apply to additional types of financial institutions, such as
broker-dealers, and strengthened the ability of the U.S. Government to detect
and prosecute international money laundering and the financing of terrorism. The
principal provisions of Title III of the USA Patriot Act require that regulated
financial institutions, including state member banks: (i) establish an
anti-money laundering program that includes training and audit components;
(ii) comply with regulations regarding the verification of the identity of
any person seeking to open an account; (iii) take additional required
precautions with non-U.S. owned accounts; and (iv) perform certain
verification and certification of money laundering risk for their foreign
correspondent banking relationships. The USA Patriot Act also expanded the
conditions under which funds in a U.S. interbank account may be subject to
forfeiture and increased the penalties for violation of anti-money laundering
regulations. Failure of a financial institution to comply with the USA Patriot
Act’s requirements could have serious legal and reputational consequences for
the institution. The Bank has adopted policies, procedures and controls to
address compliance with the requirements of the USA Patriot Act under the
existing regulations and will continue to revise and update its policies,
procedures and controls to reflect changes required by the USA Patriot Act and
implementing regulations.





Sarbanes-Oxley
Act





In July
2002, Congress enacted the Sarbanes-Oxley Act of 2002, which addresses, among
other issues, corporate governance, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate information. 
Section 404 of the Sarbanes-Oxley Act requires the Company to include in its
Annual Report, a report stating management’s responsibility to establish and
maintain adequate internal control over financial reporting and management’s
conclusion on the effectiveness of the internal controls at year
end.


5





FIRST
M&F CORPORATION AND SUBSIDIARY





Capital





The
Company and the Bank are required to comply with the capital adequacy standards
established by the Federal Reserve Board and the FDIC.  There are two basic
measures of capital adequacy for bank holding companies and their banking
subsidiaries; a risk-based measure and a leverage measure.





The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among depository
institutions and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets.  Assets
and off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet
items.





The
minimum guideline for the total capital to risk-weighted assets, including
certain off-balance sheet items such as standby letters of credit ("total
capital ratio") is 8.0%.  At least half of total capital must be composed
of common equity, undivided profits, minority interests in the equity accounts
of consolidated subsidiaries, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 capital"). The remainder may consist of
subordinated debt, other preferred stock, a limited amount of loan loss
reserves, and unrealized gains on equity securities subject to limitations
("Tier 2 capital").  At December 31, 2009, the Company and the Bank were in
compliance with the total capital ratio and the Tier 1 capital ratio
requirements. Note 20 - Regulatory Matters of the Notes to Consolidated
Financial Statements presents the Company's and the Bank's capital
ratios.





Deposit
Insurance Assessments





The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. A majority of the deposits of the Bank are subject to the
deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC.  However, a portion of the Bank's deposits, relating to a savings
association acquisition, are subject to assessments imposed by the Savings
Association Insurance Fund ("SAIF") of the FDIC. The FDIC equalized the
assessment rates for BIF-insured and SAIF-insured deposits effective January 1,
1997. The assessments imposed on all FDIC deposits for deposit insurance are
risk-based and calculated using CAMELS examination ratings, risk-based capital
ratios and credit quality factors. Legislation was enacted in 1996 requiring
both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO").
The Federal Deposit Insurance Reform Act of 2005 allowed “eligible insured
depository institutions” to share a one-time assessment credit pool of
approximately $4.7 billion. Assessment credits were applied to reduce deposit
insurance assessments, not to include FICO assessments, payable after the
one-time credit regulations became effective. The Bank used up the remainder of
its credit during 2008.





The FDIC
instituted the Transaction Account Guarantee Program in 2009 to allow financial
institutions the option to insure primarily noninterest-bearing accounts for
balances in excess of the standard $250 thousand limit. The annual cost of the
additional insurance is $.10 per $100 of the additional deposit balances
insured. In an effort to replenish the deposit insurance fund the FDIC
instituted a special assessment of $.05 per $100 of total assets less Tier 1
capital as of June 30, 2009 and payable on September 30, 2009. The Company paid
$745 thousand related to this assessment. In a second replenishment action
during the fourth quarter of 2009 the FDIC instituted a requirement for banks to
prepay their fourth quarter 2009 and full year 2010, 2011 and 2012 estimated
assessments. This prepayment was due to be paid on December 30, 2009, with the
2010, 2011 and 2012 prepaid amounts to be recorded as assets and amortized in
future quarters as the actual assessments would be due. The Company was granted
an exemption by the FDIC, based on its future liquidity and de-leveraging needs,
from paying the prepaid assessment of $11.126 million.





Legislative
and Regulatory Initiatives to Address Financial and Economic Crises





The
Congress, Treasury Department and the federal banking regulators, including the
FDIC, have taken broad action since early September, 2008 to address volatility
in the U.S. banking system.





In
October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted. The EESA authorizes the Treasury Department to purchase from
financial institutions and their holding companies up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
(“TARP”).  The purpose of TARP is to restore confidence and stability to
the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other.  The Treasury Department has
allocated $250 billion towards the TARP Capital Purchase Program (“CPP”). 
Under the CPP, Treasury will purchase debt or equity securities from
participating institutions.  The TARP also includes direct purchases or
guarantees of troubled assets of financial institutions.  Participants in
the CPP are subject to executive compensation limits and are encouraged to
expand their lending and mortgage loan modifications.


6





FIRST
M&F CORPORATION AND SUBSIDIARY





On
February 27, 2009, as part of the TARP CPP, the Company entered into a Letter
Agreement and Securities Purchase Agreement (collectively, the “Purchase
Agreement”) with the Treasury Department, pursuant to which the Company sold (i)
30,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Class B Nonvoting, Series A (the “Series A Preferred Stock”) and (ii) a warrant
(the “Warrant”) to purchase 513,113 shares of the Company’s common stock (“the
“Common Stock”), par value $5.00 per share, for an aggregate purchase price of
$30 million in cash.





The
Series A Preferred Stock qualifies as Tier 1 capital and is entitled to
cumulative dividends at a rate of 5% per annum for the first five years, and 9%
per annum thereafter. The Warrant has a 10-year term and is immediately
exercisable upon its issuance, with an exercise price, subject to anti-dilution
adjustments, equal to the 20-trading day trailing average price of the common
stock at the date of issuance of the preferred stock.





EESA also
increased FDIC deposit insurance on most accounts from $100,000 to
$250,000.  This increase is in place until the end of 2013 and is not
covered by deposit insurance premiums paid by the banking industry.





Following
a systemic risk determination, the FDIC established a Temporary Liquidity
Guarantee Program (“TLGP”) on October 14, 2008.  The TLGP includes the
Transaction Account Guarantee Program (“TAGP”), which provides unlimited deposit
insurance coverage through June 30, 2010 for noninterest-bearing transaction
accounts (typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts.  Institutions participating in the
TAGP pay a 10 basis points fee (annualized) on the balance of each covered
account in excess of $250,000, while the extra deposit insurance is in place.
The Company is participating in the TAGP.





Available
Information





The
Company maintains an internet website at www.mfbank.com. The Company makes
available free of charge on the website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed with the Securities and Exchange Commission. These reports
are made available on the Company's website as soon as reasonably practical
after the reports are filed with the Commission. Information on the Company's
website is not incorporated into this Form 10-K or the Company's other
securities filings and is not a part of them.


7





FIRST
M&F CORPORATION AND SUBSIDIARY





STATISTICAL
DISCLOSURE





The
statistical disclosures for the Company are contained in Tables 1 through
12.





Table
1





AVERAGE
BALANCE SHEETS/YIELDS





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Average
                  
                  
                  
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  
                  
                  
                  Yield/Balance
                  
                  
                  Interest
                  
                  
                  Cost
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Cost
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  CostInterest-bearing
      bank balances
                  
                  $
                  25,151
                  
                  
                  $
                  42
                  
                  
                  
                  0.17
                  %
                  
                  $
                  6,954
                  
                  
                  $
                  133
                  
                  
                  
                  1.91
                  %
                  
                  $
                  4,693
                  
                  
                  $
                  225
                  
                  
                  
                  4.79
                  %Federal
      funds sold
                  
                  
                  43,871
                  
                  
                  
                  95
                  
                  
                  
                  0.22
                  
                  
                  
                  9,810
                  
                  
                  
                  182
                  
                  
                  
                  1.86
                  
                  
                  
                  3,388
                  
                  
                  
                  144
                  
                  
                  
                  4.25Taxable
      investments
                  
                  
                  234,942
                  
                  
                  
                  9,531
                  
                  
                  
                  4.06
                  
                  
                  
                  176,284
                  
                  
                  
                  9,023
                  
                  
                  
                  5.12
                  
                  
                  
                  197,167
                  
                  
                  
                  9,514
                  
                  
                  
                  4.83Tax-exempt
      investments
                  
                  
                  56,021
                  
                  
                  
                  3,357
                  
                  
                  
                  5.99
                  
                  
                  
                  55,990
                  
                  
                  
                  3,451
                  
                  
                  
                  6.16
                  
                  
                  
                  45,875
                  
                  
                  
                  2,867
                  
                  
                  
                  6.25Loans
                  
                  
                  1,130,428
                  
                  
                  
                  67,290
                  
                  
                  
                  5.95
                  
                  
                  
                  1,206,798
                  
                  
                  
                  81,972
                  
                  
                  
                  6.79
                  
                  
                  
                  1,156,436
                  
                  
                  
                  90,403
                  
                  
                  
                  7.82Total
      earning assets
                  
                  
                  1,490,413
                  
                  
                  
                  80,315
                  
                  
                  
                  5.39
                  
                  
                  
                  1,455,836
                  
                  
                  
                  94,761
                  
                  
                  
                  6.51
                  
                  
                  
                  1,407,559
                  
                  
                  
                  103,153
                  
                  
                  
                  7.33Nonearning
      assets
                  
                  
                  154,747
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  166,867
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  166,071Total
      average assets
                  
                  $
                  1,645,160
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,621,703
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,573,630NOW
      & MMDA
                  
                  
                  447,909
                  
                  
                  
                  5,839
                  
                  
                  
                  1.30
                  
                  
                  
                  388,588
                  
                  
                  
                  7,336
                  
                  
                  
                  1.89
                  
                  
                  
                  324,649
                  
                  
                  
                  6,124
                  
                  
                  
                  1.89Savings
      deposits
                  
                  
                  113,397
                  
                  
                  
                  1,679
                  
                  
                  
                  1.48
                  
                  
                  
                  115,027
                  
                  
                  
                  2,645
                  
                  
                  
                  2.30
                  
                  
                  
                  101,367
                  
                  
                  
                  2,816
                  
                  
                  
                  2.78Certificates
      of deposit
                  
                  
                  569,623
                  
                  
                  
                  16,183
                  
                  
                  
                  2.84
                  
                  
                  
                  587,695
                  
                  
                  
                  22,274
                  
                  
                  
                  3.79
                  
                  
                  
                  599,393
                  
                  
                  
                  27,692
                  
                  
                  
                  4.62Short-term
      borrowings
                  
                  
                  10,448
                  
                  
                  
                  97
                  
                  
                  
                  0.93
                  
                  
                  
                  13,860
                  
                  
                  
                  327
                  
                  
                  
                  2.36
                  
                  
                  
                  12,445
                  
                  
                  
                  609
                  
                  
                  
                  4.89Other
      borrowings
                  
                  
                  165,548
                  
                  
                  
                  7,441
                  
                  
                  
                  4.49
                  
                  
                  
                  186,978
                  
                  
                  
                  8,710
                  
                  
                  
                  4.66
                  
                  
                  
                  208,738
                  
                  
                  
                  10,635
                  
                  
                  
                  5.09Total
      interest-bearing liabilities
                  
                  
                  1,306,925
                  
                  
                  
                  31,239
                  
                  
                  
                  2.39
                  
                  
                  
                  1,292,148
                  
                  
                  
                  41,292
                  
                  
                  
                  3.20
                  
                  
                  
                  1,246,592
                  
                  
                  
                  47,876
                  
                  
                  
                  3.84Noninterest-bearing
      deposits
                  
                  
                  190,541
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  179,237
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  182,598Noninterest-bearing
      liabilities
                  
                  
                  8,538
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,312
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,357Capital
                  
                  
                  139,156
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  142,006
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  134,083Total
      avg. liabilities & equity
                  
                  $
                  1,645,160
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,621,703
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,573,630Net
      interest margin
                  
                  
                  
                  
                  
                  
                  49,076
                  
                  
                  
                  3.29
                  
                  
                  
                  
                  
                  
                  
                  53,469
                  
                  
                  
                  3.67
                  
                  
                  
                  
                  
                  
                  
                  55,277
                  
                  
                  
                  3.93Less
      tax equivalent adjustmentInvestments
                  
                  
                  
                  
                  
                  
                  1,252
                  
                  
                  
                  0.08
                  
                  
                  
                  
                  
                  
                  
                  1,287
                  
                  
                  
                  0.09
                  
                  
                  
                  
                  
                  
                  
                  1,069
                  
                  
                  
                  0.08Loans
                  
                  
                  
                  
                  
                  
                  230
                  
                  
                  
                  0.02
                  
                  
                  
                  
                  
                  
                  
                  186
                  
                  
                  
                  0.01
                  
                  
                  
                  
                  
                  
                  
                  168
                  
                  
                  
                  0.01Reported
      book net interest margin
                  
                  
                  
                  
                  
                  $
                  47,594
                  
                  
                  
                  3.19
                  %
                  
                  
                  
                  
                  
                  $
                  51,996
                  
                  
                  
                  3.57
                  %
                  
                  
                  
                  
                  
                  $
                  54,040
                  
                  
                  
                  3.84
                  %





Tax
equivalent adjustments were made using a blended Federal/State rate of
37.3%.





Nonaccrual
loans are included in the average loan balances.





Table
2





RATE/VOLUME
VARIANCES





2009 Compared To 2008
                
                
                2008 Compared To 2007(Dollars in thousands)
                
                Increase (Decrease) Due To
                
                
                Increase (Decrease) Due ToYield/
                
                
                
                
                
                
                
                
                Yield/Volume
                
                
                Cost
                
                
                Net
                
                
                Volume
                
                
                Cost
                
                
                NetInterest earned on:Interest-bearing
      bank balances
                
                $
                189
                
                
                $
                (280
                )
                
                $
                (91
                )
                
                $
                76
                
                
                $
                (168
                )
                
                $
                (92
                )Federal
      funds sold
                
                
                353
                
                
                
                (440
                )
                
                
                (87
                )
                
                
                196
                
                
                
                (158
                )
                
                
                38Taxable
      investments
                
                
                2,691
                
                
                
                (2,183
                )
                
                
                508
                
                
                
                (1,038
                )
                
                
                547
                
                
                
                (491
                )Tax-exempt
      investments
                
                
                2
                
                
                
                (96
                )
                
                
                (94
                )
                
                
                628
                
                
                
                (44
                )
                
                
                584Loans
                
                
                (4,867
                )
                
                
                (9,815
                )
                
                
                (14,682
                )
                
                
                3,679
                
                
                
                (12,110
                )
                
                
                (8,431
                )Total
      earning assets
                
                
                2,057
                
                
                
                (16,503
                )
                
                
                (14,446
                )
                
                
                3,340
                
                
                
                (11,732
                )
                
                
                (8,392
                )Interest
      paid on:NOW
      & MMDA
                
                
                947
                
                
                
                (2,444
                )
                
                
                (1,497
                )
                
                
                1,212
                
                
                
                -
                
                
                
                1,212Savings
      deposits
                
                
                (31
                )
                
                
                (935
                )
                
                
                (966
                )
                
                
                347
                
                
                
                (518
                )
                
                
                (171
                )Certificates
      of deposit
                
                
                (599
                )
                
                
                (5,492
                )
                
                
                (6,091
                )
                
                
                (491
                )
                
                
                (4,927
                )
                
                
                (5,418
                )Short-term
      borrowings
                
                
                (56
                )
                
                
                (174
                )
                
                
                (230
                )
                
                
                51
                
                
                
                (333
                )
                
                
                (282
                )Other
      borrowings
                
                
                (981
                )
                
                
                (288
                )
                
                
                (1,269
                )
                
                
                (1,062
                )
                
                
                (863
                )
                
                
                (1,925
                )Total
      interest-bearing liabilities
                
                
                413
                
                
                
                (10,466
                )
                
                
                (10,053
                )
                
                
                1,603
                
                
                
                (8,187
                )
                
                
                (6,584
                )Change
      in net interest income on a tax-equivalent basis
                
                $
                1,644
                
                
                $
                (6,037
                )
                
                $
                (4,393
                )
                
                $
                1,737
                
                
                $
                (3,545
                )
                
                $
                (1,808
                )





The
rate/volume variances are computed for each line item and are therefore
non-additive.


8





FIRST
M&F CORPORATION AND SUBSIDIARY





Table
3





SECURITIES
AVAILABLE FOR SALE





Carrying Value of SecuritiesDecember 31(Dollars in thousands)
                              
                              2009
                              
                              
                              2008
                              
                              
                              2007Securities Available For
    SaleU.S.
      Treasury
                              
                              $
                              517
                              
                              
                              $
                              543
                              
                              
                              $
                              3,534U.S.
      Government sponsored entities
                              
                              
                              55,161
                              
                              
                              
                              8,397
                              
                              
                              
                              70,168Mortgage-backed
      securities
                              
                              
                              167,875
                              
                              
                              
                              145,362
                              
                              
                              
                              102,114Obligations
      of states and political subdivisions
                              
                              
                              56,586
                              
                              
                              
                              64,829
                              
                              
                              
                              52,518Other
      securities
                              
                              
                              4,411
                              
                              
                              
                              8,014
                              
                              
                              
                              8,804Total
      securities available for sale
                              
                              $
                              284,550
                              
                              
                              $
                              227,145
                              
                              
                              $
                              237,138





Amortized Cost of SecuritiesDecember 312009
                              
                              
                              2008
                              
                              
                              2007Securities Available For
    SaleU.S.
      Treasury
                              
                              $
                              503
                              
                              
                              $
                              509
                              
                              
                              $
                              3,512U.S.
      Government sponsored entities
                              
                              
                              54,746
                              
                              
                              
                              8,089
                              
                              
                              
                              69,954Mortgage-backed
      securities
                              
                              
                              162,647
                              
                              
                              
                              141,688
                              
                              
                              
                              101,653Obligations
      of states and political subdivisions
                              
                              
                              55,153
                              
                              
                              
                              64,357
                              
                              
                              
                              52,329Other
      securities
                              
                              
                              7,421
                              
                              
                              
                              9,239
                              
                              
                              
                              9,127Total
      securities available for sale
                              
                              $
                              280,470
                              
                              
                              $
                              223,882
                              
                              
                              $
                              236,575





Table
4





MATURITY
DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE





After OneWithin
                      
                      
                      
                      
                      
                      But Within
                      
                      
                      
                      
                      
                      After Five(Dollars in thousands)
                      
                      One
                      
                      
                      
                      
                      
                      Five
                      
                      
                      
                      
                      
                      But Within
                      
                      
                      
                      
                      
                      OverYear
                      
                      
                      Yield
                      
                      
                      Years
                      
                      
                      Yield
                      
                      
                      Ten Years
                      
                      
                      Yield
                      
                      
                      Ten Years
                      
                      
                      Yield
                      
                      
                      Total
                      
                      
                      YieldSecurities Available For SaleU.S.
      Treasury
                      
                      $
                      517
                      
                      
                      
                      4.60
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      -
                      
                      
                      
                      -
                      %
                      
                      $
                      517
                      
                      
                      
                      4.60
                      %U.S.
      Government sponsored entities
                      
                      
                      15,294
                      
                      
                      
                      2.24
                      
                      
                      
                      36,867
                      
                      
                      
                      2.22
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      55,161
                      
                      
                      
                      2.23Mortgage-backed
      securities
                      
                      
                      46,960
                      
                      
                      
                      4.47
                      
                      
                      
                      108,674
                      
                      
                      
                      4.61
                      
                      
                      
                      8,602
                      
                      
                      
                      4.82
                      
                      
                      
                      3,639
                      
                      
                      
                      4.26
                      
                      
                      
                      167,875
                      
                      
                      
                      4.58Obligations
      of states and political subdivisions
                      
                      
                      11,276
                      
                      
                      
                      6.43
                      
                      
                      
                      23,594
                      
                      
                      
                      5.97
                      
                      
                      
                      20,872
                      
                      
                      
                      6.24
                      
                      
                      
                      844
                      
                      
                      
                      9.47
                      
                      
                      
                      56,586
                      
                      
                      
                      6.21Other
      debt securities
                      
                      
                      515
                      
                      
                      
                      4.13
                      
                      
                      
                      1,971
                      
                      
                      
                      5.39
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,080
                      
                      
                      
                      2.82
                      
                      
                      
                      3,566
                      
                      
                      
                      4.43Total
      debt securities available for sale
                      
                      $
                      74,562
                      
                      
                      
                      4.31
                      %
                      
                      $
                      174,106
                      
                      
                      
                      4.26
                      %
                      
                      $
                      29,474
                      
                      
                      
                      5.83
                      %
                      
                      $
                      5,563
                      
                      
                      
                      4.77
                      %
                      
                      
                      283,705
                      
                      
                      
                      4.44
                      %Equity
      securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      845$
                      284,550





Tax
equivalent adjustments were made using a blended Federal rate of 34.0% and a
State rate of 5.0%. The amounts shown represent the investment portfolio as
stated at its carrying value.





Non
mortgage-backed securities are categorized in the earlier of their maturity
dates or call dates. Mortgage-backed securities are distributed based upon their
estimated average lives.


9





FIRST
M&F CORPORATION AND SUBSIDIARY





Table
5





COMPOSITION
OF THE LOAN PORTFOLIO





2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005(Dollars in
                    
                    
                    
                    
                    % Of
                    
                    
                    
                    
                    
                    % Of
                    
                    
                    
                    
                    
                    % Of
                    
                    
                    
                    
                    
                    % Of
                    
                    
                    
                    
                    
                    % Ofthousands)
                    
                    Amount
                    
                    
                    Total
                    
                    
                    Amount
                    
                    
                    Total
                    
                    
                    Amount
                    
                    
                    Total
                    
                    
                    Amount
                    
                    
                    Total
                    
                    
                    Amount
                    
                    
                    TotalHeld For InvestmentCommercial,
      financial and agricultural
                    
                    $
                    120,415
                    
                    
                    
                    11.38
                    %
                    
                    $
                    127,704
                    
                    
                    
                    10.85
                    %
                    
                    $
                    169,447
                    
                    
                    
                    13.90
                    %
                    
                    $
                    150,905
                    
                    
                    
                    13.88
                    %
                    
                    $
                    151,598
                    
                    
                    
                    16.25
                    %Non-residential
      real estate
                    
                    
                    643,804
                    
                    
                    
                    60.83
                    
                    
                    
                    745,699
                    
                    
                    
                    63.39
                    
                    
                    
                    731,595
                    
                    
                    
                    59.99
                    
                    
                    
                    621,841
                    
                    
                    
                    57.19
                    
                    
                    
                    509,986
                    
                    
                    
                    54.65Residential
      real estate
                    
                    
                    239,921
                    
                    
                    
                    22.67
                    
                    
                    
                    255,488
                    
                    
                    
                    21.71
                    
                    
                    
                    269,601
                    
                    
                    
                    22.11
                    
                    
                    
                    262,046
                    
                    
                    
                    24.10
                    
                    
                    
                    227,166
                    
                    
                    
                    24.35Consumer
      loans
                    
                    
                    44,586
                    
                    
                    
                    4.21
                    
                    
                    
                    37,908
                    
                    
                    
                    3.22
                    
                    
                    
                    40,860
                    
                    
                    
                    3.35
                    
                    
                    
                    45,872
                    
                    
                    
                    4.22
                    
                    
                    
                    41,458
                    
                    
                    
                    4.44Other
      loans
                    
                    
                    9,614
                    
                    
                    
                    0.91
                    
                    
                    
                    9,796
                    
                    
                    
                    0.83
                    
                    
                    
                    7,932
                    
                    
                    
                    0.65
                    
                    
                    
                    6,350
                    
                    
                    
                    0.59
                    
                    
                    
                    2,872
                    
                    
                    
                    0.31Lease
      financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    269
                    
                    
                    
                    0.02
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      loans
                    
                    $
                    1,058,340
                    
                    
                    
                    100.00
                    %
                    
                    $
                    1,176,595
                    
                    
                    
                    100.00
                    %
                    
                    $
                    1,219,435
                    
                    
                    
                    100.00
                    %
                    
                    $
                    1,087,283
                    
                    
                    
                    100.00
                    %
                    
                    $
                    933,080
                    
                    
                    
                    100.00
                    %Loans
      held for sale
                    
                    $
                    10,266
                    
                    
                    
                    
                    
                    
                    $
                    7,698
                    
                    
                    
                    
                    
                    
                    $
                    5,571
                    
                    
                    
                    
                    
                    
                    $
                    7,263
                    
                    
                    
                    
                    
                    
                    $
                    5,704





Table
6





LOAN
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES





Maturity distribution of loans at December 31, 2009
                
                Within
                
                
                One to Five
                
                
                After Five(Dollars in thousands)
                
                One Year
                
                
                Years
                
                
                Years
                
                
                TotalCommercial,
      financial and agricultural
                
                $
                69,017
                
                
                $
                48,503
                
                
                $
                2,895
                
                
                $
                120,415Non-residential
      real estate
                
                
                188,435
                
                
                
                394,877
                
                
                
                60,492
                
                
                
                643,804Residential
      real estate
                
                
                35,183
                
                
                
                113,471
                
                
                
                91,267
                
                
                
                239,921Consumer
      loans
                
                
                12,510
                
                
                
                31,782
                
                
                
                294
                
                
                
                44,586Other
      loans
                
                
                883
                
                
                
                6,241
                
                
                
                2,490
                
                
                
                9,614Total
      loans
                
                $
                306,028
                
                
                $
                594,874
                
                
                $
                157,438
                
                
                $
                1,058,340





Rate sensitivity of loans at December 31, 2009
                
                One to Five
                
                
                After FiveYears
                
                
                Years
                
                
                TotalFixed
      rate loans
                
                $
                568,298
                
                
                $
                126,027
                
                
                $
                694,325Floating
      rate loans
                
                
                26,576
                
                
                
                31,411
                
                
                
                57,987Total
                
                $
                594,874
                
                
                $
                157,438
                
                
                $
                752,312





Table
7





NONPERFORMING
ASSETS AND PAST DUE LOANS





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Nonaccrual
      loans
                  
                  $
                  44,549
                  
                  
                  $
                  20,564
                  
                  
                  $
                  6,524
                  
                  
                  $
                  3,557
                  
                  
                  $
                  1,403Other
      real estate owned
                  
                  
                  23,578
                  
                  
                  
                  11,061
                  
                  
                  
                  6,232
                  
                  
                  
                  3,135
                  
                  
                  
                  3,042Total
      nonperforming assets
                  
                  $
                  68,127
                  
                  
                  $
                  31,625
                  
                  
                  $
                  12,756
                  
                  
                  $
                  6,692
                  
                  
                  $
                  4,445Accruing
      loans past due 90 days or more
                  
                  
                  2,479
                  
                  
                  
                  5,686
                  
                  
                  
                  1,093
                  
                  
                  
                  376
                  
                  
                  
                  510Restructured
      loans (accruing)
                  
                  
                  4,620
                  
                  
                  
                  3,664
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      income that would have been recorded on nonaccrual loans if they had been
      current and accruing
                  
                  $
                  3,183Interest
      that was recorded in the financial statements for loans that were on
      nonaccrual status
                  
                  $
                  233


10





FIRST
M&F CORPORATION AND SUBSIDIARY





Table
8





ANALYSIS
OF THE ALLOWANCE FOR LOAN LOSSES





(Dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Balance
      at beginning of year
                
                $
                24,918
                
                
                $
                14,217
                
                
                $
                14,950
                
                
                $
                12,449
                
                
                $
                11,619Adjustment
      for purchase acquisition
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,234
                
                
                
                -Charge
      offs:Commercial,
      financial and agricultural
                
                
                (4,605
                )
                
                
                (993
                )
                
                
                (762
                )
                
                
                (767
                )
                
                
                (1,141
                )Real
      estate – nonresidential
                
                
                (42,133
                )
                
                
                (5,235
                )
                
                
                (1,223
                )
                
                
                (282
                )
                
                
                (182
                )Real
      estate – residential
                
                
                (3,409
                )
                
                
                (1,968
                )
                
                
                (1,581
                )
                
                
                (1,512
                )
                
                
                (464
                )Consumer
                
                
                (1,093
                )
                
                
                (1,510
                )
                
                
                (1,178
                )
                
                
                (1,264
                )
                
                
                (1,286
                )Total
                
                
                (51,240
                )
                
                
                (9,706
                )
                
                
                (4,744
                )
                
                
                (3,825
                )
                
                
                (3,073
                )Recoveries:Commercial,
      financial and agricultural
                
                
                169
                
                
                
                75
                
                
                
                373
                
                
                
                256
                
                
                
                101Real
      estate – nonresidential
                
                
                174
                
                
                
                135
                
                
                
                666
                
                
                
                228
                
                
                
                49Real
      estate – residential
                
                
                47
                
                
                
                67
                
                
                
                25
                
                
                
                102
                
                
                
                152Consumer
                
                
                345
                
                
                
                396
                
                
                
                427
                
                
                
                474
                
                
                
                455Total
                
                
                735
                
                
                
                673
                
                
                
                1,491
                
                
                
                1,060
                
                
                
                757Net
      charge-offs
                
                
                (50,505
                )
                
                
                (9,033
                )
                
                
                (3,253
                )
                
                
                (2,765
                )
                
                
                (2,316
                )Provision
      for loan losses
                
                
                49,601
                
                
                
                19,734
                
                
                
                2,520
                
                
                
                3,032
                
                
                
                3,146Balance
      at end of year
                
                $
                24,014
                
                
                $
                24,918
                
                
                $
                14,217
                
                
                $
                14,950
                
                
                $
                12,449Net
      Charge-Offs To Average Loans
                
                
                4.50
                %
                
                
                0.75
                %
                
                
                0.28
                %
                
                
                0.26
                %
                
                
                0.26
                %





Table
9





ALLOCATION
OF ALLOWANCE FOR LOAN LOSSES





December 31(Dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Commercial,
      financial and agricultural
                
                $
                5,893
                
                
                $
                6,815
                
                
                $
                6,953
                
                
                $
                7,540
                
                
                $
                5,642Non-residential
      real estate
                
                
                13,375
                
                
                
                13,129
                
                
                
                3,094
                
                
                
                3,095
                
                
                
                695Residential
      real estate
                
                
                3,407
                
                
                
                1,634
                
                
                
                1,936
                
                
                
                1,865
                
                
                
                1,351Consumer
      loans
                
                
                1,339
                
                
                
                3,340
                
                
                
                2,234
                
                
                
                2,450
                
                
                
                4,761Total
      loans
                
                $
                24,014
                
                
                $
                24,918
                
                
                $
                14,217
                
                
                $
                14,950
                
                
                $
                12,449





December 31Allowance As A Percentage Of Loan Type
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Commercial,
      financial and agricultural
                
                
                4.53
                %
                
                
                4.96
                %
                
                
                3.92
                %
                
                
                4.79
                %
                
                
                3.65
                %Non-residential
      real estate
                
                
                2.08
                
                
                
                1.76
                
                
                
                0.42
                
                
                
                0.50
                
                
                
                0.14Residential
      real estate
                
                
                1.42
                
                
                
                0.64
                
                
                
                0.72
                
                
                
                0.71
                
                
                
                0.59Consumer
      loans
                
                
                3.00
                
                
                
                8.81
                
                
                
                5.47
                
                
                
                5.34
                
                
                
                11.48Total
      loans
                
                
                2.27
                %
                
                
                2.12
                %
                
                
                1.17
                %
                
                
                1.37
                %
                
                
                1.33
                %





Net Charge-Offs As A Percent Of Year End
                  
                  December 31Loans Outstanding, By Type
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Commercial,
      financial and agricultural
                  
                  
                  3.41
                  %
                  
                  
                  0.67
                  %
                  
                  
                  0.22
                  %
                  
                  
                  0.32
                  %
                  
                  
                  0.67
                  %Non-residential
      real estate
                  
                  
                  6.52
                  
                  
                  
                  0.68
                  
                  
                  
                  0.08
                  
                  
                  
                  0.01
                  
                  
                  
                  0.03Residential
      real estate
                  
                  
                  1.40
                  
                  
                  
                  0.74
                  
                  
                  
                  0.58
                  
                  
                  
                  0.54
                  
                  
                  
                  0.14Consumer
      loans
                  
                  
                  1.68
                  
                  
                  
                  2.94
                  
                  
                  
                  1.84
                  
                  
                  
                  1.72
                  
                  
                  
                  2.00Total
      loans
                  
                  
                  4.77
                  %
                  
                  
                  0.77
                  %
                  
                  
                  0.27
                  %
                  
                  
                  0.25
                  %
                  
                  
                  0.25
                  %





Table
10





TIME
DEPOSITS OF $100,000 OR MORE





The table
below shows maturities of outstanding time deposits of $100,000 or more at
December 31, 2009 (dollars in
thousands):





Three
      months or less
                
                $
                43,407Over
      three months through six months
                
                
                58,559Over
      six months through twelve months
                
                
                106,151Over
      one year
                
                
                69,803Total
                
                $
                277,919


11





FIRST
M&F CORPORATION AND SUBSIDIARY





Table
11





SELECTED
RATIOS





The
following table reflects ratios for the Company for the last three
years:





2009
                
                
                2008
                
                
                2007Return
      on average assets
                
                
                (3.63
                )%
                
                
                0.03
                %
                
                
                0.92
                %Return
      on average equity
                
                
                (42.97
                )
                
                
                0.37
                
                
                
                10.78Dividend
      payout ratio
                
                
                -
                
                
                
                866.67
                
                
                
                32.50Average
      equity to assets ratio
                
                
                8.46
                
                
                
                8.76
                
                
                
                8.52





Table
12





SHORT-TERM
BORROWINGS





The table
below presents certain information regarding the Company’s short-term borrowings
for each of the last three years:





(Dollars in thousands)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007Securities sold under agreements to repurchaseOutstanding
      at end of period
                            
                            $
                            8,642
                            
                            
                            $
                            9,728
                            
                            
                            $
                            9,676Maximum
      outstanding at any month-end during the period
                            
                            
                            12,985
                            
                            
                            
                            20,879
                            
                            
                            
                            9,676Average
      outstanding during the period
                            
                            
                            10,331
                            
                            
                            
                            12,876
                            
                            
                            
                            6,154Interest
      paid
                            
                            
                            96
                            
                            
                            
                            301
                            
                            
                            
                            273Weighted
      average rate during each period
                            
                            
                            0.93
                            %
                            
                            
                            2.34
                            %
                            
                            
                            4.44
                            %Federal funds
      purchasedOutstanding
      at end of period
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Maximum
      outstanding at any month-end during the period
                            
                            
                            -
                            
                            
                            
                            325
                            
                            
                            
                            20,000Average
      outstanding during the period
                            
                            
                            117
                            
                            
                            
                            984
                            
                            
                            
                            6,291Interest
      paid
                            
                            
                            1
                            
                            
                            
                            26
                            
                            
                            
                            336Weighted
      average rate during each period
                            
                            
                            0.80
                            %
                            
                            
                            2.62
                            %
                            
                            
                            5.34
                            %





RISK
FACTORS





The
Company faces various risks that are inherent to our business such as credit,
legal, market, operational, liquidity and regulatory risks. The following
factors could affect the performance and operating results of the Company and
its subsidiary.





The
Company may be vulnerable to certain sectors of the economy.





·
            The
      economy slowed significantly during 2008 as a freeze-up in the credit
      markets and the continuing effects of sub-prime mortgage losses made a
      dramatic impact on consumer spending, housing sales and prices,
      manufacturing activity, unemployment and interest rates. The national
      economy was in a recession throughout 2009. The direct effect of this on
      the Company was a decrease in the ability of customers in the construction
      and development industry to continue to move properties onto the market to
      provide cash flows for loan payments. These cash flow difficulties
      resulted in increased net loan losses and a significant increase in the
      allowance for loan losses.





·
            With
      83% of the loan portfolio made up of real estate secured loans, the
      Company has a significant concentration risk. If the real estate related
      sectors of the economy continue to slow down, the Company will be under
      increased pressure to allocate resources to working out problem loans and
      foreclosed properties. These workout situations could take longer and even
      become worse as the supply of properties on the market exceeds the demand.
      This supply/demand imbalance could also result in further
      losses.





·
            The
      Federal Reserve has supported and provided liquidity to the mortgage
      market by purchasing mortgage-backed securities. The Federal Reserve’s
      purchase program is scheduled to end in March 2010. If this program
      termination results in less liquidity in the mortgage-backed securities
      market, the values of the $168 million of mortgage-backed securities that
      the Company owns could decrease
significantly.





·
            A
      continued slowing of the economy and rising unemployment may affect the
      ability of the Company’s customers to make timely loan payments, or may
      cause customers to use up deposit balances, thereby causing a strain on
      the Company’s liquidity.





·
            The
      slowdown in housing sales and continued pressure on housing prices could
      reduce mortgage originations. This could result in lower mortgage
      revenues.


12





FIRST
M&F CORPORATION AND SUBSIDIARY





The
Company is subject to interest rate risk.





·
            The
      Federal Reserve Board’s Federal Open Market Committee has been using
      interest rate policy to try to stimulate the economy. The Federal Reserve
      has also used targeted lending programs to commercial and investment banks
      to provide liquidity to financial markets and began to acquire securities
      in 2008 and throughout 2009 as a means of providing targeted market
      liquidity. General interest rates are at historic lows. However, the
      amount of liquidity provided by the Federal Reserve, coupled by
      stimulation programs that have been passed and continue to be developed by
      Congress, could result in a severe inflationary scenario in the future if
      unchecked.





·
            A
      much steeper than anticipated increase in interest rates or a steep
      decline in those rates over a short period of time could cause the
      Company’s net interest margins to decrease, thereby decreasing net
      interest revenues.





·
            A
      spike in interest rates could reduce the values of interest-sensitive
      assets such as investments and loans, resulting in a decrease in
      stockholders’ equity. A decrease in interest rates will increase the value
      of liabilities, resulting in decreases in stockholders’
      equity.





Certain
changes in interest rates, inflation, deflation or the financial markets could
affect demand for the Company’s products and the Company’s ability to deliver
products efficiently.





·
            Mortgage
      originations, and therefore mortgage revenues, would be hurt by steeply
      rising interest rates.





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





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





The
Company is subject to various litigation risks.





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





Weather-related
and other natural disasters could affect the Company’s ability to operate as
well as the revenues of the insurance agencies.





·
            Natural
      disasters could interrupt the ability of the Company to conduct business
      and could restrict our customers’ ability to generate cash flows, causing
      loan losses and losses of revenues.





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





The
Company is subject to competition from various sources.





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





The
Company may terminate its pension plan within the next five to seven
years.





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





The
Company relies on the financial markets to provide needed capital.





·
            The
      Company’s stock is listed and traded on the NASDAQ Global Select Market.
      The Company depends on the liquidity of the NASDAQ  Global Select
      Market to raise equity capital. If the market should fail to operate, the
      Company may be severely constrained in raising
  capital.





·
            Due
      to its net operating losses and concentrations in real estate-related
      assets, the Company may not be financially attractive to investors. This
      could prevent the Company from being able to raise additional capital if
      needed.





·
            The
      Company has analyst coverage, and therefore, downgrades in the Company’s
      prospects by an analyst may cause the Company’s stock price to fall and
      prevent the Company from being able to access the markets for additional
      capital.


13





FIRST
M&F CORPORATION AND SUBSIDIARY





The
Company is subject to regulation by various entities.





·
            The
      Company is subject to the regulations of the Securities Exchange
      Commission (SEC), the Federal Reserve Board, the Federal Deposit Insurance
      Corporation, the Mississippi Department of Banking and Consumer Finance,
      and the Mississippi Department of Insurance. New regulations issued by
      these agencies may adversely affect the Company’s ability to carry on its
      business activities.





·
            The
      Company is subject to Federal and state laws and regulations such as
      labor, tax and environmental laws and regulations. Changes in these laws
      and regulations may adversely affect the Company’s operations or result in
      unanticipated penalties or other
costs.





·
            The
      Company is subject to the accounting rules and regulations of the SEC and
      the Financial Accounting Standards Board. The Company may become subject
      to accounting rules that adversely affect the reported financial position
      or results of operations of the Company, or that require extraordinary
      efforts and additional costs to
implement.





The
Company engages in acquisitions of other businesses.





·
            The
      Company has considered in the past and may consider in the future
      acquisitions of other banks and other types of related businesses as
      opportunities arise. The Company must raise capital for any future
      acquisitions. If the Company’s stock price is unattractive, then the
      Company may not be able to enter into a share exchange or will have to do
      so at a disadvantageous exchange ratio. This could cause undesirable
      dilution to the existing shareholders. If the Company finances
      acquisitions with cash, then the acquired company will need to produce
      sufficient cash flows to repay the debt incurred. Otherwise, the Company
      could experience financial distress or may be unable to meet its
      regulatory capital ratio
requirements.





·
            Acquisitions
      also may result in customer and employee turnover, thus increasing the
      cost of operating the new businesses. Legal contingencies, related to the
      acquired companies, beyond those that the Company is aware of could arise,
      causing unexpected costs.





The
Company participates in the U.S. Treasury’s Capital Purchase
Program.





·
            The
      Company received $30 million in funding under the Capital Purchase Program
      in exchange for preferred stock and a common stock warrant during the
      first quarter of 2009. Participation in this program constrains the
      Company’s ability to raise dividends and repurchase equity securities and
      also places certain constraints on executive compensation arrangements.
      The increased funding provides assurance that the Company can maintain its
      minimum regulatory capital ratios in the face of future large real
      estate-related losses. The Company will have to repay these funds by
      raising capital within the next four years to keep its dividend costs from
      increasing to 9% per annum.





·
            The
      rules that govern the Capital Purchase Program include restrictions on
      certain compensation to executive officers and a number of others in the
      Company. Among other things, these rules preclude golden parachute
      payments, include prohibitions on providing tax gross-ups and include
      bonus claw-back provisions. It is possible that compensation restrictions
      imposed by the Capital Purchase Program and the American Reinvestment and
      Recovery Act of 2009 could impede our ability to attract and retain
      qualified executive officers.





·
            Our
      participation in the Capital Purchase Program limits our quarterly
      dividend payments to no more than $.13 per share through the first quarter
      of 2012 without prior regulatory approval. Our ability to repurchase our
      common stock is also restricted.





·
            Since
      the Capital Purchase Program was part of legislation that has the
      reputation of being passed as a bailout of the financial industry,
      participation in the program could have negative connotations. This
      reputation of the program could hurt the Company’s reputation and impede
      its ability to attract business in competition with other financial
      institutions that did not participate. This reputational risk could also
      impede the Company’s ability to attract and retain qualified executive
      officers.





UNRESOLVED
STAFF COMMENTS





Not
Applicable.





PROPERTIES





The
Bank's legal headquarters is a 21,000 square foot, three story, brick building
located at 134 West Washington Street. This building houses the primary
administrative offices of the Bank and Company.





The Bank
owns its main office building and 38 of its branch facilities and leases six of
its locations. The Bank’s insurance agency subsidiary owns four of its locations
and leases one. The Bank’s asset-based lending subsidiary leases one
office.  The facilities occupied under lease agreements have terms which
range from month to month to ten years. The Company expects to vacate one leased
branch in each market in Memphis and Germantown, Tennessee and one owned branch
in Birmingham, Alabama in 2010.





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.


14





FIRST
M&F CORPORATION AND SUBSIDIARY





PART
II





MARKET
FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER


MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





Effective
September 1, 1996, the Company's common stock was listed with the National
Association of Securities Dealers, Inc. Automated Quotation National Market
System (NASDAQ) and became subject to trading and reporting over the counter
with most securities dealers. Effective July 1, 2006, the Company was listed on
the NASDAQ Global Select Market.





At
December 31, 2009, there were 1,166 shareholders of record of the Company's
common stock.  On December 31, 2009, the Company's stock closed at $2.21
per share.





The
following table summarizes the trading ranges and dividend payouts for the two
years ended December 31, 2009:





Quarterly
Closing Common Stock


Price
Ranges and Dividends Paid - Common


First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    Fourth2009:High
                    
                    $
                    9.00
                    
                    
                    $
                    7.39
                    
                    
                    $
                    4.70
                    
                    
                    $
                    3.25Low
                    
                    
                    4.48
                    
                    
                    
                    4.04
                    
                    
                    
                    2.66
                    
                    
                    
                    1.80Close
                    
                    
                    6.12
                    
                    
                    
                    4.07
                    
                    
                    
                    2.75
                    
                    
                    
                    2.21Dividend
                    
                    
                    .13
                    
                    
                    
                    .01
                    
                    
                    
                    .01
                    
                    
                    
                    .01
                    *2008:High
                    
                    $
                    16.03
                    
                    
                    $
                    16.00
                    
                    
                    $
                    12.96
                    
                    
                    $
                    12.00Low
                    
                    
                    13.50
                    
                    
                    
                    12.50
                    
                    
                    
                    7.93
                    
                    
                    
                    7.40Close
                    
                    
                    14.50
                    
                    
                    
                    12.55
                    
                    
                    
                    11.58
                    
                    
                    
                    8.46Dividend
                    
                    
                    .13
                    
                    
                    
                    .13
                    
                    
                    
                    .13
                    
                    
                    
                    .13
                    *





The
following table summarizes common stock and dividend performance ratios for the
five years ended December 31, 2009:





Common
Stock and Dividend Performance


2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Price/earnings
      ratio
                  
                  
                  -
                  
                  
                  
                  141.00
                  x
                  
                  
                  9.88
                  x
                  
                  
                  12.72
                  x
                  
                  
                  12.04
                  xPrice/book
      value ratio
                  
                  
                  0.26
                  x
                  
                  
                  0.56
                  x
                  
                  
                  1.02
                  x
                  
                  
                  1.38
                  x
                  
                  
                  1.29
                  xBook
      value/share
                  
                  $
                  8.36
                  
                  
                  $
                  15.00
                  
                  
                  $
                  15.45
                  
                  
                  $
                  14.15
                  
                  
                  $
                  13.06Dividend
      payout ratio
                  
                  
                  -
                  %
                  
                  
                  866.67
                  %
                  
                  
                  32.50
                  %
                  
                  
                  33.77
                  %
                  
                  
                  36.79
                  %Historical
      dividend yield
                  
                  
                  1.89
                  %
                  
                  
                  3.29
                  %
                  
                  
                  2.65
                  %
                  
                  
                  3.08
                  %
                  
                  
                  3.04
                  %





On
December 12, 2007, the Board authorized a program to repurchase up to 500,000
shares in the open market between January 1, 2008, and December 31, 2008. This
program was not renewed.





The
Company repurchased 7,500 shares at an average price of $15.55 during February
2008. The Board did not extend the repurchase program that expired on December
31, 2008.





*The
Company entered into a transaction with the Department of the Treasury under the
TARP Capital Purchase Program discussed in Part I above.  Under the terms
of the Securities Purchase Agreement, for three (3) years following closing, or
until Treasury no longer holds any shares of the Senior Preferred, the Company
will not be able to increase dividends above $0.13 per share of common stock on
a quarterly basis nor repurchase any of its shares without Treasury approval,
with limited exceptions, most significantly purchases in connection with benefit
plans. Under an informal Memorandum of Understanding entered into in November
2009 with the Federal Reserve Bank of St. Louis the Company must receive
approval from the Federal Reserve prior to paying a quarterly
dividend.


15





FIRST
M&F CORPORATION AND SUBSIDIARY





The
following table provides information regarding securities issued under our
equity compensation plans that were in effect during 2009:





Number ofSecurities to beIssued Upon
                  
                  
                  Weighted-AverageExercise of
                  
                  
                  Exercise Price ofOutstanding
                  
                  
                  Outstanding
                  
                  
                  Number of SecuritiesOptions, Warrants
                  
                  
                  Options, Warrants
                  
                  
                  Remaining AvailablePlan Name
                  
                  and Rights
                  
                  
                  and Rights
                  
                  
                  for Future IssuanceEquity
      compensation plans approved by security holders
                  
                  1999
      Stock Option Plan
                  
                  
                  21,600
                  
                  
                  $
                  15.09
                  
                  
                  
                  -2005
      Equity Incentive Plan
                  
                  
                  16,000
                  
                  
                  
                  13.29
                  
                  
                  
                  596,234Equity
      compensation plans not approved by security holders
                  
                  None
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  
                  
                  37,600
                  
                  
                  $
                  14.28
                  
                  
                  
                  596,234





In April
2005 the 2005 Equity Incentive Plan was approved by a shareholder vote and
replaced the 1999 Stock Option Plan.





The
maximum number of shares of common stock with respect to which awards may be
granted to any participant under the plan shall be 200,000 shares per calendar
year, including any awards granted which are subsequently
cancelled.





The
maximum number of shares with respect to which awards other than options and
SARs may be granted shall be 500,000 shares.





The
maximum number of shares with respect to which Incentive Stock Options may be
granted shall be 400,000 shares.





The
maximum number of shares with respect to which awards may be granted to
directors who are not employees of the Company at the time of grant shall be
100,000.





In 2009,
under the 2005 Equity Incentive Plan, there were forfeitures of 23,250 shares
and vestings of 6,000 shares of restricted stock. Also in 2009, under the 2005
Equity Incentive Plan, the Company issued 4,000 shares of stock options to
directors with a grant date strike price of $5.14, which was the grant date fair
value of the underlying stock.


16





FIRST
M&F CORPORATION AND SUBSIDIARY





Five
Year Shareholder Return Comparison





Set forth
below is a line graph comparing the yearly percentage change in the cumulative
total stockholder return on the Company’s Common Stock against the cumulative
total return of the NASDAQ Market US Index and the NASDAQ Bank Index which
consists of the period of five (5) years beginning in 2004.








12/04
                                                                    
                                                                    
                                                                    12/05
                                                                    
                                                                    
                                                                    12/06
                                                                    
                                                                    
                                                                    12/07
                                                                    
                                                                    
                                                                    12/08
                                                                    
                                                                    
                                                                    12/09First
      M&F Corporation
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    102.60
                                                                    
                                                                    
                                                                    
                                                                    122.68
                                                                    
                                                                    
                                                                    
                                                                    101.91
                                                                    
                                                                    
                                                                    
                                                                    57.22
                                                                    
                                                                    
                                                                    
                                                                    15.46NASDAQ
      Composite
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    101.33
                                                                    
                                                                    
                                                                    
                                                                    114.01
                                                                    
                                                                    
                                                                    
                                                                    123.71
                                                                    
                                                                    
                                                                    
                                                                    73.11
                                                                    
                                                                    
                                                                    
                                                                    105.61NASDAQ
      Bank
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    98.57
                                                                    
                                                                    
                                                                    
                                                                    111.92
                                                                    
                                                                    
                                                                    
                                                                    89.33
                                                                    
                                                                    
                                                                    
                                                                    71.39
                                                                    
                                                                    
                                                                    
                                                                    60.47





The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.


17




FIRST
M&F CORPORATION AND SUBSIDIARY





SELECTED
FINANCIAL DATA





(Thousands,
      except per share data)2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005EARNINGSInterest
      income
                
                $
                78,833
                
                
                $
                93,288
                
                
                $
                101,916
                
                
                $
                91,505
                
                
                $
                67,534Interest
      expense
                
                
                31,239
                
                
                
                41,292
                
                
                
                47,876
                
                
                
                39,156
                
                
                
                23,184Net
      interest income
                
                
                47,594
                
                
                
                51,996
                
                
                
                54,040
                
                
                
                52,349
                
                
                
                44,350Provision
      for loan losses
                
                
                49,601
                
                
                
                19,734
                
                
                
                2,520
                
                
                
                3,032
                
                
                
                3,146Noninterest
      income
                
                
                19,970
                
                
                
                21,131
                
                
                
                21,320
                
                
                
                20,148
                
                
                
                17,047Noninterest
      expense
                
                
                95,872
                
                
                
                54,284
                
                
                
                51,373
                
                
                
                48,926
                
                
                
                39,649Income
      taxes
                
                
                (18,104
                )
                
                
                (1,436
                )
                
                
                6,976
                
                
                
                6,598
                
                
                
                6,000Noncontrolling
      interests
                
                
                (6
                )
                
                
                19
                
                
                
                33
                
                
                
                16
                
                
                
                10Net
      income (loss)
                
                $
                (59,799
                )
                
                $
                526
                
                
                $
                14,458
                
                
                $
                13,925
                
                
                $
                12,592Net
      interest income, taxable equivalent
                
                $
                49,076
                
                
                $
                53,469
                
                
                $
                55,277
                
                
                $
                53,616
                
                
                $
                45,632Cash
      dividends paid on common stock
                
                $
                1,466
                
                
                $
                4,772
                
                
                $
                4,772
                
                
                $
                4,751
                
                
                $
                4,648PER
      COMMON SHARENet
      income (loss) - basic
                
                $
                (6.69
                )
                
                $
                0.06
                
                
                $
                1.58
                
                
                $
                1.53
                
                
                $
                1.40Cash
      dividends paid - common
                
                
                .16
                
                
                
                .52
                
                
                
                .52
                
                
                
                .52
                
                
                
                .52Book
      value - common
                
                
                8.36
                
                
                
                15.00
                
                
                
                15.45
                
                
                
                14.15
                
                
                
                13.06Closing
      stock price - common
                
                
                2.21
                
                
                
                8.46
                
                
                
                15.80
                
                
                
                19.59
                
                
                
                16.86SELECTED
      AVERAGE BALANCESAssets
                
                $
                1,645,160
                
                
                $
                1,621,703
                
                
                $
                1,573,630
                
                
                $
                1,482,013
                
                
                $
                1,209,054Earning
      assets, amortized cost
                
                
                1,490,413
                
                
                
                1,455,836
                
                
                
                1,407,559
                
                
                
                1,321,730
                
                
                
                1,093,782Loans
      held for investment
                
                
                1,122,307
                
                
                
                1,200,628
                
                
                
                1,148,275
                
                
                
                1,056,899
                
                
                
                884,232Investments,
      amortized cost
                
                
                290,963
                
                
                
                232,274
                
                
                
                243,042
                
                
                
                237,578
                
                
                
                190,067Total
      deposits
                
                
                1,321,470
                
                
                
                1,270,547
                
                
                
                1,208,007
                
                
                
                1,153,381
                
                
                
                949,228Equity
                
                
                139,156
                
                
                
                142,006
                
                
                
                134,083
                
                
                
                122,288
                
                
                
                115,723SELECTED
      YEAR-END BALANCESAssets
                
                $
                1,662,968
                
                
                $
                1,596,865
                
                
                $
                1,653,751
                
                
                $
                1,540,275
                
                
                $
                1,267,118Earning
      assets, carrying value
                
                
                1,507,966
                
                
                
                1,427,344
                
                
                
                1,467,624
                
                
                
                1,360,064
                
                
                
                1,128,101Loans
      held for investment
                
                
                1,058,340
                
                
                
                1,176,595
                
                
                
                1,219,435
                
                
                
                1,087,283
                
                
                
                933,080Investments,
      carrying value
                
                
                284,550
                
                
                
                227,145
                
                
                
                237,138
                
                
                
                261,828
                
                
                
                185,071Total
      deposits
                
                
                1,388,263
                
                
                
                1,261,387
                
                
                
                1,262,455
                
                
                
                1,185,982
                
                
                
                973,671Equity
                
                
                104,630
                
                
                
                135,968
                
                
                
                140,098
                
                
                
                128,066
                
                
                
                117,398SELECTED
      RATIOSReturn
      on average assets
                
                
                (3.63
                )%
                
                
                0.03
                %
                
                
                0.92
                %
                
                
                0.94
                %
                
                
                1.04
                %Return
      on average equity
                
                
                (42.97
                )
                
                
                0.37
                
                
                
                10.78
                
                
                
                11.39
                
                
                
                10.88Average
      equity to average assets
                
                
                8.46
                
                
                
                8.76
                
                
                
                8.52
                
                
                
                8.25
                
                
                
                9.57Dividend
      payout ratio
                
                
                -
                
                
                
                866.67
                
                
                
                32.50
                
                
                
                33.77
                
                
                
                36.79Price
      to earnings (x)
                
                
                -
                
                
                
                141.00
                x
                
                
                9.88
                x
                
                
                12.72
                x
                
                
                12.04
                xPrice
      to book (x)
                
                
                0.26
                
                
                
                0.56
                
                
                
                1.02
                
                
                
                1.38
                
                
                
                1.29


18


FIRST
M&F CORPORATION AND SUBSIDIARY





MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATIONS





The
purpose of this discussion is to focus on significant changes in financial
condition and results of operations of the Company and its banking subsidiary
during the past three years. The discussion and analysis is intended to
supplement and highlight information contained in the accompanying consolidated
financial statements and selected financial data presented elsewhere in this
report.





SUMMARY





The net
loss for 2009 was $59.799 million, or $6.69 basic and diluted loss per share as
compared to net income of $.526 million, or $.06 basic and diluted earnings per
share in 2008 and net income of $14.458 million, or $1.58 basic and $1.57
diluted earnings per share in 2007. The major factors contributing to the
earnings decrease in 2009 were (1) the $29.867 million increase in loan loss
accruals in 2009 and (2) goodwill and other intangible asset impairments of
$33.820 million in 2009. Another factor influencing the 2009 earnings was the
decrease in loans as $50.505 million in net charge-offs were taken and demands
for loans decreased as the economy slowed throughout the year. The primary
factor in the earnings decrease in 2008 was the $17.214 million increase in loan
loss accruals in 2008 and a slow-down in loan volumes. In contrast, major
factors contributing to the increased earnings in 2007 were (1) strong loan
growth in the metropolitan areas surrounding Memphis, Tennessee, Birmingham,
Alabama and Crestview, Florida, (2) a credit environment that resulted in .28%
in net charge-offs as a percentage of average loans for 2007 and (3) consistent
noninterest revenue growth from 2005 through 2007 in deposit revenues, mortgage
revenues and agency commissions.





In
February 2009, the Company closed its branch in Collierville, Tennessee and
consolidated its operations into the Cordova, Tennessee branch. Also in February
2009, the Company sold its insurance agency book of business in Olive Branch,
Mississippi and exited that insurance market. In October 2009, the Company
closed individual branches in the Philadelphia, Southaven and Starkville,
Mississippi markets and consolidated their operations into the remaining
branches in each market. In December 2009 the Company closed its Crestview,
Florida branch and consolidated its operations into the Niceville, Florida
branch.





In
February 2008, the Company closed a drive-through branch in Ridgeland,
Mississippi. In December 2008, the Company completed construction on a new main
branch facility in Brandon, Mississippi. This new branch replaced the two
existing branches which were closed. One of the closed branch buildings was sold
at the end of the year.





In June
2007, the Company opened its fourth full-service branch in the Memphis,
Tennessee, metro market in Cordova, Tennessee. In July and August 2007, the
Company opened full-service branches in Ridgeland and Brandon, Mississippi. In
November 2007, the Company opened a second Florida branch in
Niceville.





In 2008
the Company completed its implementation of branch item image capture, as this
technology was introduced into all of the branches in Alabama. This technology
allows branches to capture images of transactions at teller locations. These
images, rather than the physical checks, deposits and other items, are processed
through the information systems. The image technology allows the Company to be
more efficient in its operations and processing. In 2008 the Company also
introduced mobile banking technology, which allows individuals to access their
banking information through their cell phones. This technology adds another
convenience option for customers.





Throughout
2007, the Company rolled out a remote deposit image capture technology in which
commercial customers may electronically deposit images of items rather than
having to make physical deposits at the branches. Also during 2007, the Company
implemented (1) deposit image exchange technology, allowing it to exchange check
images with other financial institutions, and (2) remote image capture
technology in the branch system, allowing images of items to be captured at the
branch rather than having to be shipped to the data processing center. These two
technological changes allowed the Company to eliminate a substantial portion of
its courier routes, producing a reduction in courier expenses of approximately
$230 thousand during 2007. The Company also implemented an enhanced loan
processing system, designed to streamline the operational aspects of loan
originations.





Total
assets increased by 4.14% in 2009, ending the year at $1.663 billion. Total
assets decreased by 3.44% in 2008, ending the year at $1.597 billion. The
compounded annual growth rate for total assets for the last five (5) years was
7.79%, while the compounded growth rate for deposits was 9.61%.


19


FIRST
M&F CORPORATION AND SUBSIDIARY





RESULTS
OF OPERATIONS





The
following table shows performance ratios for the last three years:





2009
                
                
                2008
                
                
                2007Net
      interest margin
                
                
                3.29
                %
                
                
                3.67
                %
                
                
                3.93
                %Efficiency
      ratio
                
                
                89.87
                
                
                
                72.77
                
                
                
                67.07Return
      on assets
                
                
                (3.63
                )
                
                
                0.03
                
                
                
                0.92Return
      on equity
                
                
                (42.97
                )
                
                
                0.37
                
                
                
                10.78Noninterest
      income to avg. assets
                
                
                1.21
                
                
                
                1.30
                
                
                
                1.35Noninterest
      income to revenues (1)
                
                
                28.92
                
                
                
                28.33
                
                
                
                27.83Noninterest
      expense to avg. assets
                
                
                5.83
                
                
                
                3.35
                
                
                
                3.26Salaries
      and benefits to total noninterest expense
                
                
                29.53
                
                
                
                53.34
                
                
                
                57.13Contribution
      margin (2)
                
                
                58.99
                
                
                
                61.19
                
                
                
                61.68Nonaccrual
      loans to loans
                
                
                4.17
                
                
                
                1.74
                
                
                
                0.5390
      day past due loans to loans
                
                
                0.23
                
                
                
                0.48
                
                
                
                0.09Net
      charge-offs as a percent of average loans
                
                
                4.50
                
                
                
                0.75
                
                
                
                0.28





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


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





The
following table shows revenue related performance statistics for the last three
years:





(Dollars in
      thousands)
                
                2009
                
                
                2008
                
                
                2007Mortgage
      originations
                
                $
                97,741
                
                
                $
                62,445
                
                
                $
                73,202Treasury
      and electronic banking services revenues
                
                
                119
                
                
                
                189
                
                
                
                149Trust
      and retail investment revenues
                
                
                489
                
                
                
                585
                
                
                
                598Revenues
      per FTE employee
                
                
                131
                
                
                
                134
                
                
                
                136Agency
      commissions per agency FTE employee (1)
                
                
                99
                
                
                
                104
                
                
                
                97





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





Net
Interest Income





Net
interest income before loan loss expenses for 2009 was $47.594 million as
compared to $51.996 million for 2008. For 2009 compared to 2008: earning asset
yields decreased by 112 basis points, liability costs decreased by 81 basis
points, the net interest spread decreased by 31 basis points and the net
interest margin decreased by 38 basis points.





Net
interest income before loan loss expenses for 2008 was $51.996 million as
compared to $54.040 million for 2007. For 2008 compared to 2007: earning asset
yields decreased by 82 basis points, liability costs decreased by 64 basis
points, the net interest spread decreased by 18 basis points and the net
interest margin decreased by 26 basis points.





Balance
sheet dynamics affecting the comparative net interest margins for 2009 compared
to 2008 include (1) a decrease of 6.52% in average loans held for investment,
(2) a decrease in average loans as a percentage of earning assets from 82.47% in
2008 to 75.30% in 2009, (3) a decrease in average certificates of deposits of
3.08%, (4) a decrease in average other borrowings of 11.46% and (5) an increase
in average noninterest-bearing deposits as a percentage of total assets from
11.05% in 2008 to 11.58% in 2009.





Balance
sheet dynamics affecting the comparative net interest margins for 2008 compared
to 2007 include (1) growth of 4.56% in average loans held for investment, (2) an
increase in average loans as a percentage of earning assets from 81.58% in 2007
to 82.47% in 2008, (3) a decrease in average certificates of deposits of 1.95%,
(4) a decrease in average other borrowings of 10.42% and (5) a decrease in
average noninterest-bearing deposits as a percentage of total assets from 11.60%
in 2007 to 11.05% in 2008.





Yield and
cost dynamics affecting the comparative net interest margins for 2009 compared
to 2008 include (1) a decrease of 84 basis points in yields on loans held for
investment and for sale, (2) a decrease of 152 basis points in investment and
short-term funds yields, (3) a decrease of 86 basis points in costs of deposits
and (4) a decrease of 22 basis points in costs of borrowings.





Yield and
cost dynamics affecting the comparative net interest margins for 2008 compared
to 2007 include (1) a decrease of 103 basis points in yields on loans held for
investment and for sale, (2) a decrease of 6 basis points in investment and
short-term funds yields, (3) a decrease of 61 basis points in costs of deposits
and (4) a decrease of 58 basis points in costs of borrowings.


20


FIRST
M&F CORPORATION AND SUBSIDIARY





The
$4.402 million decrease in net interest income from 2008 to 2009 resulted from
(1) a steady decrease in loan volumes, (2) the volumes of loans in nonaccrual
status and (3) growth in interest-bearing deposits. Average loans decreased by
$76.370 million from 2008 to 2009 while average earning assets increased by
$34.577 million. This dynamic resulted in increasing volumes of earning assets
being shifted into low yielding instruments such as Fed funds sold. Loan volumes
decreased throughout the year as problem loans were disposed of and as loan
demand decreased in the recessionary economic environment. Nonaccrual loan
balances averaged approximately $57.020 million during 2009, adding to the
downward pressure on asset yields. On the funding side of the balance sheet,
average interest-bearing deposits increased by $39.619 million from 2008 to 2009
while average interest-costing liabilities increased by only $14.777 million.
Included in the increase in interest-bearing deposit balances is an increase of
$35.847 million in the Company’s premium-rate Summit Checking product which cost
on average 2.19% during 2009. Relief to funding costs was provided from a
decrease in average borrowings as the mix of interest-costing funding shifted
more toward deposits.





Although
loan yields and deposit costs both decreased during 2009, the spread between
loan yields and deposit costs expanded from 380 basis points in the fourth
quarter of 2008 to 417 basis points in the fourth quarter of 2009. This
increased spread followed the interest rate environment as spreads between
3-month and 5-year Treasury rates expanded from 188 basis points during the
fourth quarter of 2008 to 224 basis points during the fourth quarter of 2009.
However, for the year the deterioration in asset yields outweighed the advantage
of decreased funding costs as asset yields fell by 112 basis points while
funding costs fell by 81 basis points for 2009 as compared to 2008.





The
primary driver of the net interest margin trend in 2008 and 2007 was the
divergence between loan pricing and deposit pricing. While interest rates moved
up during 2006 and 2007, deposit pricing became more sensitive to the
interest-rate environment. At the same time, loan pricing became less sensitive.
Therefore, as interest rates moved up, the Company’s loan pricing spreads
decreased and deposit pricing spreads increased. In 2008 deposit pricing
decoupled from loan pricing as market rates decreased. As interest rates
decreased during 2008, loan pricing became much more sensitive to market rates.
However, deposit pricing became uncorrelated from market rates, resulting in a
decrease in loan yields of 103 basis points coupled with a smaller decrease in
deposit costs of 61 basis points.





Management
expects that the Federal Reserve will continue to maintain its 0 to .25% Fed
funds target rate until economic indicators show improvements in the economy.
Therefore, four challenges for 2010 will be to (1) maintain loan yields in a
low-rate environment in which loan demand may be extremely soft, (2) manage the
earning asset mix to improve yields if market opportunities arise, (3) take
advantage of opportunities to decrease deposit costs or to leverage new deposit
relationships with sales of related fee-based services and (4) manage the
funding mix to emphasize checking accounts and interest-bearing deposits over
borrowed funds. Wider credit market spreads, combined with a normally-shaped
yield curve, should help to stabilize loan yields during 2010 if the economy
begins to recover. The Company’s focus in 2010 will be on improving asset
quality, liquidating foreclosed assets and problem loans, diversifying the loan
portfolio, building capital and funding the balance sheet with deposits. Within
this overall focus, the Company will use loan and deposit pricing strategies and
sales and business development strategies that are consistent with achieving
these goals.


21


FIRST
M&F CORPORATION AND SUBSIDIARY





Provision
for Loan Losses





During
2009 the Company’s provision for loan losses increased to $49.601 million from
$19.734 million in 2008 and $2.520 million in 2007. The increased loan loss
accruals were the result of deterioration primarily in the land development and
construction loan portfolio. The deterioration in the values of real estate
collateral was the primary factor affecting the provisions for 2008 and
2009.





Nonaccrual
loans grew to $44.549 million at the end of 2009 from $20.564 million at the end
of 2008 and $6.524 million at the end of 2007. Nonperforming assets as a
percentage of total assets increased from .77% at the end of 2007 to 1.98% at
the end of 2008 and 4.15% at the end of 2009. The slow-down in housing that
began in 2007 continued to worsen throughout 2008 and 2009. The lack of a liquid
housing market has had a direct effect on developers and builders as lots and
speculative houses have become more difficult to move and prices have continued
to drop in search of an equilibrium. The percentage of allowance for loan loss
to total loans held for investment was 2.27% at December 31, 2009, 2.12% at
December 31, 2008, and 1.17% at December 31, 2007.





Noninterest
Income





The
Company has introduced new types of accounts since 2004 that encourage the use
of debit cards and internet banking. Debit card activity increased by over 20%
annually over the last three years. Overdraft revenues tend to be sensitive to
economic conditions. The overdraft revenue decrease in 2009 was the result of a
decrease in spending by customers as the economy softened beginning in 2008 and
into 2009. Numbers of items charged increased by 4.72% in 2008 and decreased by
12.01% in 2009.





The
following table summarizes the different categories that make up total service
charges on deposit accounts:





(Dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007Service
      charge revenues
                
                $
                1,368
                
                
                $
                1,415
                
                
                $
                1,413Debit/ATM
      card revenues
                
                
                2,518
                
                
                
                2,219
                
                
                
                1,855Overdraft
      fee revenues
                
                
                7,090
                
                
                
                8,058
                
                
                
                7,697Service
      charges on deposit accounts
                
                $
                10,976
                
                
                $
                11,692
                
                
                $
                10,962





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. Overdraft limits,
which are equivalent to credit limits, were increased for accounts in the
overdraft protection program during 2007. This policy change influenced the
increased volume that was experienced during 2008. Overdrafts are considered
loans for accounting purposes and therefore are subject to the Company’s loan
accounting policies concerning the charging off of accounts to the allowance for
loan losses. Interest charged on overdrawn balances, based on the Federal
discount rate, is recorded as interest on loans. The overdraft program is
designed to help customers with their cash flow needs and is not extended to
individuals who are poor credit risks.





Management
expects debit card revenues to continue to drive deposit revenues for the
foreseeable future. Overdraft fee revenues should remain a dependable source of
revenues over the course of 2010. Any deterioration in the economy, or a strong
economic recovery, may influence customer habits relative to overdraft activity,
making overdraft item volumes hard to predict.





Mortgage
originations increased in 2009 as compared to 2008 as mortgage rates fell over
the course of the year. In 2009 mortgage rates hit their highs of 5.59% in June
and decreased over the course of the year to hit their lows of 4.71% in
December. Origination volumes increased in 2009 over 2008 due to (1)
refinancings brought about by lower rates and (2) new mortgages resulting from
the first-time home buyer tax credit. The slow housing market had a direct
effect on mortgage originations in 2008 as volumes decreased by 14.69%. This
reduction in volumes directly resulted in the decrease that occurred in mortgage
banking income for 2008. Mortgage rates decreased for much of the first half of
2008. After spiking from 5.85% at the end of March to 6.63% by the middle of
July, mortgage rates came under the influence of the Federal Reserve’s Open
Market Operations as the Fed became a buyer of mortgage-backed securities. Rates
began to fall and ended 2008 at 5.14%. With the housing market extremely soft
during 2008, much of the increased origination volume tended to be refinanced
mortgages. During 2007 disruptions resulting from the subprime mortgage problems
had two effects: (1) borrowers became more cautious, even while market rates
decreased, resulting in fewer originations than would have ordinarily occurred
and (2) investors reduced profit margins available to the Company when pricing
mortgages to purchase, thereby reducing revenues per mortgage sold. These
effects continued more pervasive into 2008. Additions to the originations staff
were the primary factor in the improved originations and mortgage revenues for
2007.





Management
expects the housing market to continue to be weak in 2010. It appears that the
Federal Reserve has announced its intent to end its program of purchasing
mortgage-backed securities as of the end of the first quarter of 2010. However,
it is difficult to predict what will happen once the Federal Reserve is not
supporting mortgage security prices. If their exit from the market results in
higher rates, then the Company’s mortgage revenues will most likely decrease
without an improvement in the housing markets.


22


FIRST
M&F CORPORATION AND SUBSIDIARY





Agency
commissions decreased in 2009 and 2008 after growing from 2005 through 2007. The
soft economy has hurt demand for insurance products with annuities having the
most severe decrease. Insurance companies have reduced premiums, thereby
reducing the commissions that the Company earns. Annuity commissions decreased
by 88.97% in 2009, decreased by 16.83% in 2008 and decreased by 18.06% in 2007.
Over 80% of agency commissions are from property and casualty products. The
revenues from these lines decreased by 2.62% in 2009 after increasing by 1.03%
in 2008.





Management
expects 2010 to remain a difficult and competitive environment for insurance
products.





Significant
components of other income for 2007 through 2009 are contained in the following
table:





(Dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007Agency
      profit-sharing revenues
                
                $
                433
                
                
                $
                392
                
                
                $
                302Loan
      fees
                
                
                399
                
                
                
                494
                
                
                
                519Gains
      on student loan sales
                
                
                133
                
                
                
                218
                
                
                
                300Loss
      on bankers bank stock
                
                
                (78
                )
                
                
                -
                
                
                
                -Insurance
      claim for legal settlements
                
                
                -
                
                
                
                -
                
                
                
                370All
      other income
                
                
                1,525
                
                
                
                1,802
                
                
                
                2,104Other
      income
                
                $
                2,412
                
                
                $
                2,906
                
                
                $
                3,595





The
Company incurred a $126 thousand loss on the extinguishment of a called FHLB
borrowing during the second quarter of 2007. The debt, which was assumed in the
Columbiana Bancshares acquisition, was carried at less than its face amount due
to its being recorded at fair market value at the acquisition date. Therefore,
the remaining unamortized purchase discount precipitated the loss recognition on
the liquidation of the borrowing.





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. Three of the beneficial interests, Trapeza
I, Trapeza II and Trapeza V, deferred their interest payments and were placed in
nonaccrual status during 2009. The Trapeza I beneficial interest failed an
impairment test at June 30, 2009. The Trapeza V and MM Community Funding IX
beneficial interests failed impairment tests at September 30, 2009. The Trapeza
II, Tpref Funding II and MM Community Funding IX beneficial interests failed
impairment tests at December 31, 2009. The MM Community Funding IX beneficial
interest was placed in nonaccrual status during the fourth quarter after failing
the impairment test. The total amount of interest that would have been
outstanding as a receivable if the securities had been in accrual status at the
end of 2009 was $149 thousand.





These
beneficial interests are secured and funded by trust preferred securities issued
by commercial and savings banks. The significant problems that occurred in the
housing market and the related mortgage market beginning in 2008 resulted in
widespread losses for financial institutions that had exposure to those markets.
Many of those financial institutions had issued trust preferred securities that
had been purchased and securitized by the trusts that issued the beneficial
interests that the Company had invested in. Certain of these financial
institutions began to default on their trust preferred securities, resulting in
deficiencies in the collateral securing and funding the beneficial interests.
The Company’s holdings are at risk if enough of the trust preferred securities
default so that the beneficial interests senior to and equal to the Company’s
owned beneficial interests cannot be fully paid. Impairment tests of these
beneficial interests are performed each quarter to determine if losses are
expected due to cash flow deficiencies. This is primarily done by projecting
cash flows to be received on the Company’s interests owned after determining the
effect of expected collateral defaults on the payments made by the interests
senior to and equal to the Company’s interests owned. If the cash flows expected
to be received by the Company are less than the original contractual cash flows,
then an other-than-temporary credit-related impairment, which is charged against
current earnings, is assumed. The remaining difference between the fair value of
the beneficial interest and its book value is charged against other
comprehensive income.





The
following table shows the other-than-temporary charges that the Company incurred
during 2009.





(Dollars in thousands)
                
                Other-Than-Temporary Impairment
                
                
                Other-Than-Temporary ImpairmentCharged Against Earnings
                
                
                Charged To Other Comprehensive IncomeName of Issuer
                
                2nd Quarter
                
                
                3rd Quarter
                
                
                4th Quarter
                
                
                2nd Quarter
                
                
                3rd Quarter
                
                
                4th QuarterTrapeza
      I 2002-1A
                
                $
                175
                
                
                $
                -
                
                
                $
                -
                
                
                $
                218
                
                
                $
                -
                
                
                $
                -Trapeza
      II 2003-2A
                
                
                -
                
                
                
                -
                
                
                
                200
                
                
                
                -
                
                
                
                -
                
                
                
                769Tpref
      Funding II
                
                
                -
                
                
                
                -
                
                
                
                113
                
                
                
                -
                
                
                
                -
                
                
                
                632Trapeza
      V 2003-5A
                
                
                -
                
                
                
                167
                
                
                
                -
                
                
                
                -
                
                
                
                501
                
                
                
                -MM
      Community Funding IX
                
                
                -
                
                
                
                70
                
                
                
                104
                
                
                
                -
                
                
                
                493
                
                
                
                85Total
                
                $
                175
                
                
                $
                237
                
                
                $
                417
                
                
                $
                218
                
                
                $
                994
                
                
                $
                1,486


23


FIRST
M&F CORPORATION AND SUBSIDIARY





The
following table summarizes certain financial information about the trust
preferred security-backed CDOs at the end of 2009 and 2008.





As of December 31, 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
                  
                  
                  $
                  125
                  
                  
                  $
                  450
                  
                  Ca
                  
                  
                  25
                  
                  
                  
                  43.09
                  %
                  
                  
                  0.00
                  %Trapeza
      II 2003-2A
                  
                  
                  C1
                  
                  
                  
                  1,050
                  
                  
                  
                  281
                  
                  
                  
                  769
                  
                  Ca
                  
                  
                  40
                  
                  
                  
                  33.36
                  
                  
                  
                  3.01Tpref
      Funding II
                  
                  
                  B
                  
                  
                  
                  887
                  
                  
                  
                  255
                  
                  
                  
                  632
                  
                  Caa3
                  
                  
                  34
                  
                  
                  
                  26.60
                  
                  
                  
                  0.00Trapeza
      V 2003-5A
                  
                  
                  C1
                  
                  
                  
                  832
                  
                  
                  
                  170
                  
                  
                  
                  662
                  
                  Ca
                  
                  
                  43
                  
                  
                  
                  26.09
                  
                  
                  
                  0.10MM Community Funding IX
                  
                  
                  B1
                  
                  
                  
                  827
                  
                  
                  
                  249
                  
                  
                  
                  578
                  
                  Caa3
                  
                  
                  34
                  
                  
                  
                  38.04
                  
                  
                  
                  0.00$
                  4,171
                  
                  
                  $
                  1,080
                  
                  
                  $
                  3,091





As of December 31, 2008(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
                  
                  
                  $
                  753
                  
                  
                  $
                  587
                  
                  
                  $
                  166
                  
                  Ca
                  
                  
                  25
                  
                  
                  
                  21.02
                  %
                  
                  
                  5.12
                  %Trapeza
      II 2003-2A
                  
                  
                  C1
                  
                  
                  
                  1,260
                  
                  
                  
                  999
                  
                  
                  
                  261
                  
                  Caa2
                  
                  
                  39
                  
                  
                  
                  6.80
                  
                  
                  
                  40.18Tpref
      Funding II
                  
                  
                  B
                  
                  
                  
                  1,006
                  
                  
                  
                  800
                  
                  
                  
                  206
                  
                  Ba3
                  
                  
                  34
                  
                  
                  
                  7.51
                  
                  
                  
                  3.10Trapeza
      V 2003-5A
                  
                  
                  C1
                  
                  
                  
                  1,029
                  
                  
                  
                  791
                  
                  
                  
                  238
                  
                  Ca
                  
                  
                  43
                  
                  
                  
                  14.86
                  
                  
                  
                  14.19MM Community Funding IX
                  
                  
                  B1
                  
                  
                  
                  1,006
                  
                  
                  
                  792
                  
                  
                  
                  214
                  
                  B3
                  
                  
                  34
                  
                  
                  
                  10.08
                  
                  
                  
                  28.35$
                  5,054
                  
                  
                  $
                  3,969
                  
                  
                  $
                  1,085





The
excess subordination percent is an indication of the ability of the collateral,
net of known defaults and deferrals, to cover the payment of the beneficial
interests that the Company owns after all senior beneficial interests have been
paid off. A positive percent indicates the excess percent of funds available
over what is required to pay off the beneficial interests that the Company owns.
A percent of zero indicates that the amount of funds available is less than the
balance of the beneficial interests that the Company owns. This calculation
assumes that underlying securities that are deferring interest payments will all
default and not be able to provide funds to pay off the beneficial interests.
Therefore, any tests that assume that some of the deferring securities will
begin to pay their interest and eventually their principal in the future may
indicate that the beneficial interests are not impaired even when the excess
subordination is zero. Alternatively, a beneficial interest that shows positive
excess subordination may indicate an impairment in a test if the test
expectation is that certain underlying securities that are currently performing
will eventually default and not provide any funds to pay the beneficial
interests.





Noninterest
Expense





Salary
and benefits expenses decreased in 2009 with average full-time equivalent
employees decreasing from 555 in 2008 to 528 in 2009. The Company closed 5
branches in 2009 without exiting any markets. For 2009 compared to 2008,
salaries were down by $574 thousand, health plan costs were down by $426
thousand, 401k savings plan costs were down by $326 thousand and pension
expenses were up by $768 thousand. During 2008 the Company reduced personnel by
13 full-time equivalent employees in branches that were acquired or denovo
expansions in the previous three years. During the second quarter of 2007
Management effectively instituted a hiring freeze intended to contain costs in
the aftermath of the acquisition and expansion efforts of 2006.





The
number of full-time equivalent employees was 512 at the end of 2009, 543 at the
end of 2008 and 564 at the end of 2007.





Health
care related costs decreased by 19.53% in 2009, increased by 84.37% in 2008 and
decreased by 24.15% in 2007. Health care costs rise and fall primarily due to
claims experience and secondarily by the number of covered
employees.





Occupancy
expense increased by 9.59% during 2009 due primarily to additional depreciation
amounts related to the abandonment of leasehold improvements. Occupancy expense
increased during 2008 due to the expansion into rented office space in 2007 in
Cordova, Tennessee and Niceville, Florida and the expansion into new constructed
facilities in Ridgeland and Brandon, Mississippi. During 2007 occupancy and
equipment expenses increased due primarily to the bank acquisitions in Alabama
and Tennessee in 2006 as well as the additional expansions in Tennessee and
Florida later that year. Rent expenses represented 30% of the dollar increase in
occupancy and equipment expenses for 2007 and 40% for 2008.





Most
categories of noninterest expense were down in 2009 as efforts were made to cut
expenses and increase efficiencies across the entire
organization.


24


FIRST
M&F CORPORATION AND SUBSIDIARY





Legal
expenses increased in 2008 and 2009 primarily due to increased legal activity
related to problem loan workouts and credit-related issues. Legal expenses were
reduced by $365 thousand in 2007 for the reduction in the estimate of an accrued
legal liability. The original accrual for legal contingencies was triggered in
2004 by the expectation of and subsequent settlement negotiations of several
related cases.





Foreclosed
property losses and expenses increased by $5.370 million in 2009 over 2008 and
by $1.361 million in 2008 over 2007. This was a direct result of the problems
that were encountered in the land development and construction loan portfolio.
Other real estate increased from $6.232 million at the end of 2007 to $11.061
million at the end of 2008 and $23.578 million at the end of 2009.





The
components of foreclosed property expenses for the last three years are
contained in the following table:





(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Losses
      on sales of other real estate
                    
                    $
                    1,677
                    
                    
                    $
                    258
                    
                    
                    $
                    24Write-downs
      of other real estate
                    
                    
                    4,101
                    
                    
                    
                    1,117
                    
                    
                    
                    255Other
      real estate expenses
                    
                    
                    1,543
                    
                    
                    
                    557
                    
                    
                    
                    284Rental
      income on other real estate properties
                    
                    
                    (38
                    )
                    
                    
                    (19
                    )
                    
                    
                    (11
                    )Total
      foreclosed property expenses
                    
                    $
                    7,283
                    
                    
                    $
                    1,913
                    
                    
                    $
                    552





FDIC
insurance assessments in 2009 increased significantly over 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 in 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. During the third quarter the base assessment rate for
the Company increased from 14 basis points to 22 basis points based on a change
in the classification of the Company into a lower performance
category.





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 – Regulatory Matters
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.


25


FIRST
M&F CORPORATION AND SUBSIDIARY





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


26


FIRST
M&F CORPORATION AND SUBSIDIARY





Intangible
asset impairments





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





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





Income
Taxes





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 2009. The $18.104
million tax benefit for 2009 includes a deferred tax benefit of $10.855 million
and a current tax benefit of $7.249 million. At December 31, 2009, the Company
had a current tax benefit receivable of $8.498 million and a deferred tax asset
of $15.219 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 (1) current tax benefits increase as losses are realized
through loan charge-offs and collateral foreclosures and dispositions and (2)
future earnings become sufficient to absorb the deductions. The following table
shows the earnings, tax effect and effects on tax rates of the loan loss accrual
and the primarily non-tax deductible goodwill and other impairment charges
separate from the remaining statement of operations items on 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
                        
                        $
                        5,512
                        
                        
                        $
                        (33,820
                        )
                        
                        $
                        (49,601
                        )
                        
                        $
                        (77,909
                        )Income
      taxes
                        
                        
                        862
                        
                        
                        
                        (465
                        )
                        
                        
                        (18,501
                        )
                        
                        
                        (18,104
                        )Net
      income (loss) before noncontrolling interests
                        
                        $
                        4,650
                        
                        
                        $
                        (33,355
                        )
                        
                        $
                        (31,100
                        )
                        
                        $
                        (59,805
                        )Effective
      tax rate beforenoncontrolling interests
                        
                        
                        15.64
                        %
                        
                        
                        1.37
                        %
                        
                        
                        37.30
                        %
                        
                        
                        23.24
                        %





Excluding
the effect of $2.105 million in tax-exempt securities income and $762 thousand
in non-taxable corporate-owned insurance revenues, the average tax rate for
earnings before impairments and loan loss accruals was 34.67%.





The tax
benefit in 2008 resulted primarily from the $17.214 million increase in loan
loss accruals. Excluding the loan loss accruals, net income before taxes would
have been $18.843 million with a tax expense of $5.925 million, resulting in an
average tax rate of 31.44%.





The 2007
increase was consistent with the increase in pre-tax earnings while municipal
investment income decreased. The Company primarily uses tax-exempt securities
and loans to provide tax benefits and does not use any exotic tax-shelter
vehicles. The Company received the benefit of $716 thousand in 2008 and of
$1.025 million in 2007 in net operating losses and $107 thousand in 2008 and
$198 thousand in 2007 in affordable housing tax credits carried over from the
Columbiana Bancshares acquisition.





The
Company had no recognized uncertain tax positions as of December 31, 2008 or
2009 and therefore did not have any tax accruals during 2008 or 2009 related to
uncertain positions.


27


FIRST
M&F CORPORATION AND SUBSIDIARY





Quarterly
Financial Trends (Unaudited)





The
following table summarizes components of the Company’s statements of operations
by quarter for 2009 and 2008:





2009First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  Fourth(Dollars
      in thousands)
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  QuarterInterest
      income
                  
                  $
                  20,261
                  
                  
                  $
                  19,160
                  
                  
                  $
                  19,926
                  
                  
                  $
                  19,486Interest
      expense
                  
                  
                  8,417
                  
                  
                  
                  7,895
                  
                  
                  
                  7,628
                  
                  
                  
                  7,299Net
      interest income
                  
                  
                  11,844
                  
                  
                  
                  11,265
                  
                  
                  
                  12,298
                  
                  
                  
                  12,187Provision
      for loan losses
                  
                  
                  19,840
                  
                  
                  
                  9,195
                  
                  
                  
                  4,805
                  
                  
                  
                  15,761Noninterest
      income
                  
                  
                  5,188
                  
                  
                  
                  4,976
                  
                  
                  
                  5,381
                  
                  
                  
                  4,425Noninterest
      expense
                  
                  
                  31,041
                  
                  
                  
                  15,815
                  
                  
                  
                  14,140
                  
                  
                  
                  34,876Income
      taxes
                  
                  
                  (6,592
                  )
                  
                  
                  (3,660
                  )
                  
                  
                  (1,137
                  )
                  
                  
                  (6,715
                  )Noncontrolling
      interest
                  
                  
                  (16
                  )
                  
                  
                  2
                  
                  
                  
                  7
                  
                  
                  
                  1Net
      income (loss)
                  
                  $
                  (27,241
                  )
                  
                  $
                  (5,111
                  )
                  
                  $
                  (136
                  )
                  
                  $
                  (27,311
                  )Per
      common share:Net
      income (loss) – basic
                  
                  $
                  (2.99
                  )
                  
                  $
                  (.61
                  )
                  
                  $
                  (.06
                  )
                  
                  $
                  (3.03
                  )Net
      income (loss) - diluted
                  
                  $
                  (2.99
                  )
                  
                  $
                  (.61
                  )
                  
                  $
                  (.06
                  )
                  
                  $
                  (3.03
                  )Cash
      dividends
                  
                  
                  .13
                  
                  
                  
                  .01
                  
                  
                  
                  .01
                  
                  
                  
                  .01





2008First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    Fourth(Dollars
      in thousands)
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    QuarterInterest
      income
                    
                    $
                    25,281
                    
                    
                    $
                    23,405
                    
                    
                    $
                    22,479
                    
                    
                    $
                    22,123Interest
      expense
                    
                    
                    12,154
                    
                    
                    
                    10,305
                    
                    
                    
                    9,459
                    
                    
                    
                    9,374Net
      interest income
                    
                    
                    13,127
                    
                    
                    
                    13,100
                    
                    
                    
                    13,020
                    
                    
                    
                    12,749Provision
      for loan losses
                    
                    
                    780
                    
                    
                    
                    6,080
                    
                    
                    
                    2,190
                    
                    
                    
                    10,684Noninterest
      income
                    
                    
                    5,512
                    
                    
                    
                    5,270
                    
                    
                    
                    5,517
                    
                    
                    
                    4,832Noninterest
      expense
                    
                    
                    13,354
                    
                    
                    
                    13,460
                    
                    
                    
                    13,229
                    
                    
                    
                    14,241Income
      taxes
                    
                    
                    1,363
                    
                    
                    
                    (710
                    )
                    
                    
                    902
                    
                    
                    
                    (2,991
                    )Noncontrolling
      interest
                    
                    
                    3
                    
                    
                    
                    6
                    
                    
                    
                    6
                    
                    
                    
                    4Net
      income (loss)
                    
                    $
                    3,139
                    
                    
                    $
                    (466
                    )
                    
                    $
                    2,210
                    
                    
                    $
                    (4,357
                    )Per
      common share:Net
      income (loss) - basic
                    
                    $
                    .35
                    
                    
                    $
                    (.05
                    )
                    
                    $
                    .24
                    
                    
                    $
                    (.48
                    )Net
      income (loss) - diluted
                    
                    $
                    .35
                    
                    
                    $
                    (.05
                    )
                    
                    $
                    .24
                    
                    
                    $
                    (.48
                    )Cash
      dividends
                    
                    
                    .13
                    
                    
                    
                    .13
                    
                    
                    
                    .13
                    
                    
                    
                    .13





Fourth
Quarter Earnings





Loan loss
accruals for the fourth quarter of 2009 were up by $10.956 million from the
third quarter as the Company took significant loan write-downs with subsequent
replenishment of the allowance for loan losses. Net charge-offs were $24.442
million during the fourth quarter as compared to $3.433 million during the third
quarter of 2009. Consequently, the provision for loan losses increased to
$15.761 million for the fourth quarter of 2009 as compared to $4.805 million for
the third quarter.





Foreclosure
expenses for the fourth quarter of 2009 were up by $3.985 million due primarily
to write-downs of properties in the fourth quarter. Write-downs of other real
estate properties of $3.178 million and losses on sales of properties of $682
thousand were taken during the fourth quarter of 2009.





The
fourth quarter operating results also included a charge of $16.772 million for
the impairment of the Company’s goodwill asset. The Company incurred a goodwill
impairment charge of $15.800 million during the first quarter of 2009. A
subsequent test, triggered by operating losses and a declining stock price, was
performed as of December 31, 2009. This test resulted in the complete write-off
of the remaining goodwill balance.


28


FIRST
M&F CORPORATION AND SUBSIDIARY





FINANCIAL
CONDITION





Earning
Assets





The
average earning asset mix for 2009 was 75.85% in loans, 19.52% in investments,
and 4.63% in short-term funds. The average earning asset mix for 2008 was 82.89%
in loans, 15.96% in investments and 1.15% in short-term funds. The average
earning asset mix for 2007 was 82.16% in loans, 17.27% in investments, and .57%
in short-term funds. Loans held for investment decreased by 10.05% in 2009 while
deposits increased by 10.06%. Loans held for investment decreased by 3.51% in
2008 while deposits decreased by .08%. Loans held for investment grew by 12.15%
in 2007 while deposits grew by 6.45%. The following table shows the volume
changes in loans and deposits over the last three years:





(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Net
      increase (decrease) in loans
                    
                    $
                    (118,255
                    )
                    
                    $
                    (42,840
                    )
                    
                    $
                    132,152Net
      increase (decrease) in deposits
                    
                    
                    126,876
                    
                    
                    
                    (1,068
                    )
                    
                    
                    76,473Ratio
      of loan growth to deposit growth
                    
                    
                    (93.21
                    )%
                    
                    
                    4,011.24
                    %
                    
                    
                    172.81
                    %





Assets
increased by 4.14% from December 31, 2008 to December 31, 2009, and decreased by
3.44% from December 31, 2007 to December 31, 2008. Investments increased by
25.27% in 2009 after decreasing by 4.21% in 2008. The Company purchased $51.832
million in government-sponsored entity securities and $86.283 million in
mortgage-backed securities during 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
and build the Company’s short-term liquidity position. Approximately $10.629
million of mortgage-backed securities were sold during 2009 for a gain of $449
thousand to take advantage of the improved pricing in the mortgage-backed
markets. Liquidity provided by deposit growth and maturities of
government-sponsored entity securities during 2008 were used to purchase $63.305
million of mortgage-backed securities and $24.154 million of municipal bonds, as
the loan portfolio did not require any additional funding.





Real
estate-related loans decreased during 2009 as the Company sought to remove
problem real estate loans and diversify into other areas. The amount of
construction and land development loans was reduced by more than 50% during 2009
as loans were worked out, charge-off, sold and foreclosed on. Consumer loans
grew steadily over the course of 2009. The Company began the process of
diversifying the product mix of the loan portfolio during the first quarter of
2009 by de-emphasizing commercial and residential construction loans. A renewed
emphasis was made on consumer and small business commercial loans. Loans held to
maturity decreased by $118.255 million or 10.05% from December 31, 2008 to
December 31, 2009, and decreased by $42.840 million or 3.51% from December 31,
2007 to December 31, 2008. Management expects that the loan portfolio’s decline
or increase in size over the next year will depend on the resolution of the
remaining real estate-related and other problem loans as well as the strength of
the economy as it relates to consumer and commercial loans. Loans held for
investment as a percent of total assets were 63.64% at December 31, 2009, 73.68%
at December 31, 2008, and 73.74% at December 31, 2007.





As the
economy softened throughout 2008, loan demand decreased while credit standards
were generally tightened. Volumes in construction-related loans and commercial
loans decreased significantly. Construction-related loans were hurt by the
effects of the housing crisis, and some of the decrease in balances occurred due
to foreclosures. Commercial loans decreased as demand for this type of credit
dried up as business slowed and consumers and small businesses began to conserve
cash and eschew debt. Loan growth during 2007 occurred primarily in the
metropolitan markets that the Company expanded into during 2006. The Company was
not directly adversely affected by the subprime market problems that arose
during the summer of 2007 and which continued to deteriorate through the
remainder of the year. However there were some indications of a spillover effect
into the prime market during the latter part of the year.





Excluding
acquisitions commercial loans decreased by 5.71% in 2009, decreased by 24.63% in
2008 and grew by 12.29% in 2007. The asset-based lending operation portfolio in
Memphis, M&F Business Credit, Inc., grew by 3.85% in 2009, grew by 9.14% in
2008 and grew by 7.11% in 2007.





No loan
growth is expected for 2010 as the economy should continue to be weak and the
remaining problem loans in the portfolio are worked out. A challenge for the
Company going forward is the diversification of the loan portfolio to reduce
concentration risks. A move toward commercial and consumer lending is requiring
a change in the mix of skills within the team of lenders, which will unfold over
the coming years. The strength of the Madison, Hinds, Lee and DeSoto County
economies has historically provided growth opportunities for the Company in
Mississippi. The Company’s expansion efforts in Memphis, Tennessee, in and
around Birmingham, Alabama, and in northwest Florida provided significant growth
during 2007. When the economy improves, these markets should recover and begin
to provide loan demand.


29


FIRST
M&F CORPORATION AND SUBSIDIARY





Liability
Management





Deposits
increased by 10.06% during 2009 and were flat during 2008. The following table
shows the breakdown by deposit category of core deposits and public funds
deposits growth from December 31, 2008 to December 31, 2009:





Core Customers
                
                
                Public Funds
                
                
                Total Deposits(Dollars in thousands)
                
                Increase (Decrease)
                
                
                Increase (Decrease)
                
                
                Increase (Decrease)Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.
                
                
                Amt.
                
                
                Pct.Noninterest-bearing
                
                $
                39,978
                
                
                
                23.28
                %
                
                $
                9,912
                
                
                
                142.31
                %
                
                $
                49,890
                
                
                
                27.92
                %NOW
                
                
                35,983
                
                
                
                21.25
                
                
                
                56,228
                
                
                
                117.10
                
                
                
                92,211
                
                
                
                42.43MMDA
                
                
                (28,176
                )
                
                
                (17.73
                )
                
                
                7,382
                
                
                
                31.53
                
                
                
                (20,794
                )
                
                
                (11.40
                )Savings
                
                
                (1,325
                )
                
                
                (1.16
                )
                
                
                (192
                )
                
                
                (41.58
                )
                
                
                (1,517
                )
                
                
                (1.33
                )Customer
      CDs
                
                
                60,702
                
                
                
                13.31
                
                
                
                (53,193
                )
                
                
                (57.03
                )
                
                
                7,509
                
                
                
                1.37Brokered
      CDs
                
                
                (2,219
                )
                
                
                (13.03
                )
                
                
                1,796
                
                
                
                72.86
                
                
                
                (423
                )
                
                
                (2.17
                )Total
                
                $
                104,943
                
                
                
                9.66
                %
                
                $
                21,933
                
                
                
                12.56
                %
                
                $
                126,876
                
                
                
                10.06
                %





Interest-bearing
checking and certificate of deposit core customer deposits were up during 2009.
The interest-bearing Summit Checking account continued to be the sales leader
for deposit products for 2008 and 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 $27.479 million during 2009 and by
$56.046 million during 2008. The Company became less aggressive in its
rate-bidding process for certificates of deposits of municipalities during 2009
as deposit growth occurred in noninterest-bearing and interest-bearing checking
accounts. The core noninterest-bearing and interest-bearing deposit growth
occurred as consumers cut spending and began to accumulate liquidity during
uncertain economic times. Customer and employee incentives were used during 2008
to promote checking and interest-bearing transaction accounts over more
price-sensitive certificates of deposit. Certificates of deposit were
de-emphasized during 2008 and balances decreased accordingly by 7.04%.
Approximately half of the Company’s deposit growth in 2007 occurred in Rankin
County, Mississippi, the Memphis, Tennessee metro area and the Florida markets.
The 2007 growth occurred primarily in consumer and commercial money-market
accounts and 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.


30


FIRST
M&F CORPORATION AND SUBSIDIARY





The
following table shows the deposit mix for the last three year ends:





(Dollars in thousands)
                
                December 31, 2009
                
                
                December 31, 2008
                
                
                December 31, 2007Noninterest-bearing
      demand
                
                $
                228,579
                
                
                $
                178,689
                
                
                $
                191,206NOW
      deposits
                
                
                309,545
                
                
                
                217,334
                
                
                
                190,067Money
      market deposits
                
                
                161,570
                
                
                
                182,364
                
                
                
                156,364Savings
      deposits
                
                
                112,764
                
                
                
                114,281
                
                
                
                105,924Certificates
      of deposit
                
                
                556,733
                
                
                
                549,224
                
                
                
                590,831Brokered
      certificates of deposit
                
                
                19,072
                
                
                
                19,495
                
                
                
                28,063Total
                
                $
                1,388,263
                
                
                $
                1,261,387
                
                
                $
                1,262,455





The
following table shows the mix of public funds deposits as of the last three year
ends:





(Dollars in thousands)
                
                December 31, 2009
                
                
                December 31, 2008
                
                
                December 31, 2007Noninterest-bearing
      demand
                
                $
                16,877
                
                
                $
                6,965
                
                
                $
                6,990NOW
      deposits
                
                
                104,247
                
                
                
                48,019
                
                
                
                66,157Money
      market deposits
                
                
                30,793
                
                
                
                23,411
                
                
                
                15,336Savings
      deposits
                
                
                277
                
                
                
                469
                
                
                
                290Certificates
      of deposit
                
                
                40,072
                
                
                
                93,265
                
                
                
                89,842Brokered
      certificates of deposit
                
                
                4,261
                
                
                
                2,465
                
                
                
                1,580Total
                
                $
                196,527
                
                
                $
                174,594
                
                
                $
                180,195





Other
borrowings decreased by 19.16% in 2009, decreased by 24.72% in 2008 and
increased by 20.98% in 2007. 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 33.62% of other
borrowings at December 31, 2008 to 62.20% at December 31, 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. The Company expects to have sufficient cash flows to retire
the debt according to its contractual terms.





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





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


31


FIRST
M&F CORPORATION AND SUBSIDIARY





Fair
Value





The
Company uses fair value accounting within a mixed-attribute accounting
environment in which (1) certain items are accounted for at fair value with net
changes being recorded in earnings, (2) certain items are accounted for at fair
value with net changes being recorded in other comprehensive income (in other
words, being charged directly to stockholders’ equity), (3) certain items are
accounted for at the lower of fair value or amortized cost with net changes
being recorded in earnings, (4) certain items are accounted for at the lower of
an adjusted fair value or amortized cost and (5) certain items are accounted for
at amortized cost. Fair value is defined in the accounting standards as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants.





The
turmoil that began in the sub-prime mortgage markets in 2007 evolved into a
liquidity crisis as investors became less willing to purchase commercial paper
and beneficial interests of entities that invested in mortgages and
mortgage-related securities. This lack of liquidity surfaced in mutual funds as
holdings had to be written down and shareholders began to redeem their shares.
The demand for cash by the investors forced large liquidations of fund holdings,
thus putting extreme downward pressure on asset prices. During 2008 and into
2009, the economy slowed considerably, adding to the negative effects of the
original mortgage crisis. As investors became less willing to purchase
securities, the markets for many instruments became illiquid, with few if any
transactions occurring. Therefore, anyone who valued an instrument based upon
the last observed transaction usually had to use a price that was set by a
desperate seller and a buyer who acted as a market vulture. This was the case
even when the instrument was performing and cash flows seemed intact. This lack
of liquidity and dearth of quoted prices resulted in extremely large write-downs
of assets on the books of companies such as investment banks who accounted for
most of their assets at fair value with changes flowing through
earnings.





During
2008, the Financial Accounting Standards Board clarified its fair value standard
as it is applied in situations where the market for a financial asset is not
active. This clarification provided that other information may be more relevant
than historical trading prices in valuing an instrument when markets are
disrupted to the point that there are only a few observable transactions and
those transactions are distressed and do not reflect the economics underlying
the instruments. This clarification reduced the amounts of fair value
write-downs taken by banks during the fourth quarter of 2008 and into
2009.





The
Company has investments in five asset-backed securities also known as
collateralized debt obligations (CDOs) that are beneficial interests. These
beneficial interests were issued by vehicles that used the proceeds to invest in
trust preferred securities of commercial banks. Trust preferred securities are a
long-term form of capital that were used by commercial banks during the past
three to five years to fund acquisitions of other banks, repurchases of common
stock and denovo expansion efforts. Some of the trust preferred securities in
these trusts were issued by banks that incurred significant losses on sub-prime
mortgages and other real estate-related loans, resulting in defaults on the
trust preferred securities. As defaults and deferrals of dividend payments on
these securities have increased, covenants have been triggered within these
trusts to divert incoming cash flows toward the payment of the most senior
securities issued by the trusts. As this occurred, the trusts began to defer
interest payments on the less senior instruments. The financial troubles which
led to deferrals of payments by the issuing banks led to a re-evaluation of the
credit quality of the beneficial interests, secured by the issuing bank trust
preferred securities, issued by the trusts. These reviews resulted in downgrades
by Moody’s of the five CDOs that the Company owns to below investment grade.
Since observable transactions in these securities are extremely rare, the
Company uses assumptions that a market participant would use in valuing these
instruments. These assumptions primarily include cash flow estimates and market
discount rates. The cash flow estimates are sensitive to the assumptions related
to the ability of the issuers to pay the underlying trust preferred securities
according to their terms. The market discount rates depend on transactions,
which are rare given the lack of interest of investors in these types of
beneficial interests. As of the end of 2009, the Company carried these
investments at 25.90% of amortized cost, with the unrealized losses of
approximately $3.091 million recorded in stockholders’ equity, net of tax, as a
component of other comprehensive income. As of the end of 2008, the Company
carried these investments at 78.53% of amortized cost, with the unrealized
losses of approximately $1.085 million recorded in stockholders’ equity, net of
tax, as a component of other comprehensive income.





The
Company recorded $829 thousand in other-than-temporary impairment losses through
earnings on these securities in 2009. The credit downgrades at the end of 2008
and in the first quarter of 2009 were the first indicator that an
other-than-temporary impairment may be present in some of these beneficial
interests. Impairment tests are performed quarterly and consist of estimating
the cash flows that are available to pay the beneficial interests and
discounting those cash flows using the Company’s initial yield at purchase as
the discount rate. Any deficit of the discounted value below the book value of
the beneficial interest is considered a credit-related other-than-temporary
impairment and is charged against current earnings. The remainder of the
difference between the fair value and the book value of the beneficial
interested is considered an other-than-temporary impairment charged separately
to other comprehensive income. The second quarter testing resulted in a $175
thousand credit-related impairment charge against earnings and a $218 thousand
other impairment charge to other comprehensive income on one beneficial
interest. The third quarter testing resulted in a $237 thousand credit-related
impairment charge against earnings and a $994 thousand other impairment charge
to other comprehensive income on two beneficial interests. The fourth quarter
testing resulted in a $417 thousand credit-related impairment charge against
earnings and a $1.486 million other impairment charge to other comprehensive
income on three beneficial interests.


32


FIRST
M&F CORPORATION AND SUBSIDIARY





An
economic by-product of the sub-prime mortgage crisis has been the slow-down in
the housing markets. Lack of demand in housing, an over-supply of homes on the
market, a tightening of available credit by banks and a general deterioration in
the economy have affected the Company’s ability to dispose of foreclosed
properties and to arrive at values of real estate collateral for loan impairment
testing. As real estate values fell throughout 2008 and into 2009, the Company
experienced losses on sales and write downs of foreclosed real estate of $5.778
million in 2009 as compared to $1.376 million in 2008. Real estate-related loan
impairment calculations became more severe, resulting in $42.368 million in loan
loss accruals related to real estate secured loans in 2009 as compared to
$16.734 million in 2008. The Company estimates that fair values of properties
related to land development and construction and commercial real estate will
remain under pressure into 2010, and may result in additional loan loss accruals
for loan impairments.





The
Company accounts for mortgages held for sale at the lower of cost or fair value.
Fair values of mortgages are primarily influenced by market rates. The Company
also uses credit spreads in valuing mortgages held for sale. Since these loans
are originated to conform to FNMA underwriting standards, their values are not
influenced by the sub-prime mortgage market. These mortgages are generally sold
within 90 days of origination and retention of these mortgages in the Company’s
loan portfolio is rare. The Company also issues rate locks related to loan
originations and receives purchase commitments from correspondent bank investors
to purchase the loans when they are originated. These commitments to originate
and purchase are accounted for as derivatives and are therefore marked to fair
value every month with changes being recorded in mortgage banking income. Fair
value adjustments for origination derivatives contributed $17 thousand in
revenues to mortgage banking income during 2009 and $72 thousand in revenues to
mortgage banking income during 2008. Fair value adjustments for forward sale
derivatives contributed $80 thousand in revenues to mortgage banking income
during 2009 and increased mortgage banking revenues by $14 thousand during
2008.


33


FIRST
M&F CORPORATION AND SUBSIDIARY





Credit
Risk Management





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





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





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


34


FIRST
M&F CORPORATION AND SUBSIDIARY





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, a trend which
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.





Approximately
68.81% of the $44.549 million in nonaccrual loans at December 31, 2009 were in
construction and development and commercial real estate loans. These nonaccrual
balances consisted of several large loans rather than a great many small
loans.





The
following table summarizes the number and amount of nonaccrual construction and
land development loans of $500 thousand or more at the end of each quarter from
December 31, 2008 through December 31, 2009.





(Dollars in thousands)Number of Loans
                  
                  
                  AmountBalance
      at 12/31/08
                  
                  6
                  
                  
                  $
                  11,280Balance
      at 03/31/09
                  
                  12
                  
                  
                  
                  29,114Balance
      at 06/30/09
                  
                  21
                  
                  
                  
                  36,932Balance
      at 09/30/09
                  
                  20
                  
                  
                  
                  36,050Balance
      at 12/31/09
                  
                  13
                  
                  
                  
                  19,297





The
following table summarizes the number and amount of nonaccrual commercial real
estate loans of $500 thousand or more at the end of each quarter from December
31, 2008 through December 31, 2009.





(Dollars in thousands)Number of Loans
                  
                  
                  AmountBalance
      at 12/31/08
                  
                  2
                  
                  
                  $
                  1,605Balance
      at 03/31/09
                  
                  3
                  
                  
                  
                  10,988Balance
      at 06/30/09
                  
                  6
                  
                  
                  
                  17,314Balance
      at 09/30/09
                  
                  7
                  
                  
                  
                  7,595Balance
      at 12/31/09
                  
                  2
                  
                  
                  
                  3,496


35


FIRST
M&F CORPORATION AND SUBSIDIARY





The
following tables list construction and commercial real estate loans, along with
their impairment allowances, that were in non-accrual status and had balances of
$500 thousand or more at December 31, 2008 and at December 31,
2009.


December 31, 2008
                              
                              
                              December 31, 2009Six Largest Loans
                              
                              
                              Ten Largest Loans(Dollars in thousands)
                              
                              Non-accrual
                              
                              
                              Impairment
                              
                              
                              Non-accrual
                              
                              
                              ImpairmentNote, Market
                              
                              Balance
                              
                              
                              Allowance
                              
                              
                              Balance
                              
                              
                              Allowance1.
      Niceville, FL
                              
                              $
                              3,578
                              
                              
                              $
                              -
                              
                              
                              $
                              2,600
                              
                              
                              $
                              -2.
      Pelham, AL
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,999
                              
                              
                              
                              -3.
      Oxford, MS
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,960
                              
                              
                              
                              -4.
      Cordova, TN
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,849
                              
                              
                              
                              -5.
      Madison, MS
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,770
                              
                              
                              
                              -6.
      Madison, MS
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,760
                              
                              
                              
                              -7.
      Niceville, FL
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,465
                              
                              
                              
                              -8.
      Inverness, AL
                              
                              
                              2,421
                              
                              
                              
                              620
                              
                              
                              
                              1,400
                              
                              
                              
                              -9.
      Madison, MS
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,210
                              
                              
                              
                              -10.
      Brandon, MS
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,036
                              
                              
                              
                              -11.
      Inverness, AL
                              
                              
                              1,688
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -12.
      Oxford, MS
                              
                              
                              1,463
                              
                              
                              
                              195
                              
                              
                              
                              -
                              
                              
                              
                              -13.
      Oxford, MS
                              
                              
                              1,315
                              
                              
                              
                              615
                              
                              
                              
                              -
                              
                              
                              
                              -14.
      Oxford, MS
                              
                              
                              815
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Totals
                              
                              $
                              11,280
                              
                              
                              $
                              1,430
                              
                              
                              $
                              17,049
                              
                              
                              $
                              -Total
      nonaccrual construction and land development loans
                              
                              $
                              13,724
                              
                              
                              $
                              1,483
                              
                              
                              $
                              25,655
                              
                              
                              $
                              36





December 31, 2008
                                    
                                    
                                    December 31, 2009Two Largest Loans
                                    
                                    
                                    Two Largest Loans(Dollars in thousands)
                                    
                                    Non-accrual
                                    
                                    
                                    Impairment
                                    
                                    
                                    Non-accrual
                                    
                                    
                                    ImpairmentNote, Collateral Location
                                    
                                    Balance
                                    
                                    
                                    Allowance
                                    
                                    
                                    Balance
                                    
                                    
                                    Allowance15.
      Brandon, MS
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    2,980
                                    
                                    
                                    $
                                    -16.
      Southaven, MS
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    516
                                    
                                    
                                    
                                    -17.
      Oxford, MS
                                    
                                    
                                    938
                                    
                                    
                                    
                                    100
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -18.
      Columbiana, AL
                                    
                                    
                                    667
                                    
                                    
                                    
                                    148
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Totals
                                    
                                    $
                                    1,605
                                    
                                    
                                    $
                                    248
                                    
                                    
                                    $
                                    3,496
                                    
                                    
                                    $
                                    -Total
      nonaccrual commercial real estate loans
                                    
                                    $
                                    2,575
                                    
                                    
                                    $
                                    255
                                    
                                    
                                    $
                                    5,001
                                    
                                    
                                    $
                                    -


36


FIRST
M&F CORPORATION AND SUBSIDIARY





The
following table summarizes information relevant to the impairment determinations
for the ten largest construction and development loans and the two largest
commercial real estate loans that were in non-accrual status at December 31,
2009.





Non-accrual
                                                                      
                                                                      
                                                                      Impairment
                                                                      
                                                                      Information(Dollars in thousands)
                                                                      
                                                                      Type of
                                                                      
                                                                      Type of
                                                                      
                                                                      Balance
                                                                      
                                                                      
                                                                      Allowance
                                                                      
                                                                      SupportingNote, Market
                                                                      
                                                                      Borrower
                                                                      
                                                                      Collateral
                                                                      
                                                                      12/31/09
                                                                      
                                                                      
                                                                      12/31/09
                                                                      
                                                                      Allowance1.
      Niceville, FL
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Vacant
      Land
                                                                      
                                                                      $
                                                                      2,600
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      Appraisal
      dated 02/10/092.
      Pelham, AL
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Commercial
      Subdivision
                                                                      
                                                                      
                                                                      1,999
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 03/25/093.
      Oxford, MS
                                                                      
                                                                      Residential
      Developer
                                                                      
                                                                      Condominium
                                                                      
                                                                      
                                                                      1,960
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 06/01/094.
      Cordova, TN
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Vacant
      Land
                                                                      
                                                                      
                                                                      1,849
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 09/25/08
                                                                        Updated
      02/10/105.
      Madison, MS
                                                                      
                                                                      Residential
      Developer
                                                                      
                                                                      Vacant
      Land
                                                                      
                                                                      
                                                                      1,770
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 09/21/096.
      Madison, MS
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Commercial
      Subdivision
                                                                      
                                                                      
                                                                      1,760
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 12/17/087.
      Niceville, FL
                                                                      
                                                                      Residential
      Developer
                                                                      
                                                                      Residential
      Subdivision
                                                                      
                                                                      
                                                                      1,465
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 11/23/098.
      Inverness, AL
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Commercial
                                                                      
                                                                      
                                                                      1,400
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 10/03/089.
      Madison,  MS
                                                                      
                                                                      Residential
      Developer
                                                                      
                                                                      Vacant
      Land
                                                                      
                                                                      
                                                                      1,210
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 09/30/0910.
      Brandon, MS
                                                                      
                                                                      Commercial
      Developer
                                                                      
                                                                      Vacant
      Land
                                                                      
                                                                      
                                                                      1,036
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Estimated
      Cash Flow11.
      Brandon, MS
                                                                      
                                                                      Commercial
                                                                      
                                                                      Commercial
      Property
                                                                      
                                                                      
                                                                      2,980
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      Appraisal
      dated 05/15/0912.
      Southaven, MS
                                                                      
                                                                      Commercial
                                                                      
                                                                      Commercial
      Property
                                                                      
                                                                      
                                                                      516
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      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. Many of these loans were foreclosed on during 2009. Many
remaining nonaccrual loans were written down to their collateral values,
resulting in a small allowance for loan losses remaining for nonaccrual loans at
the end of 2009.


37




FIRST
M&F CORPORATION AND SUBSIDIARY





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 December 31, 2009.





December 31, 2008
                
                
                December 31, 2009(Dollars
      in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                13,724
                
                
                $
                1,483
                
                
                $
                25,655
                
                
                $
                36Accruing
      loans with an allowance
                
                
                38,302
                
                
                
                9,956
                
                
                
                16,646
                
                
                
                6,028Accruing
      loans without an allowance
                
                
                16,320
                
                
                
                -
                
                
                
                11,758
                
                
                
                -Total
                
                $
                68,346
                
                
                $
                11,439
                
                
                $
                54,059
                
                
                $
                6,064





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





December 31, 2008
                
                
                December 31, 2009(Dollars
      in thousands)
                
                Loan
                
                
                Impairment
                
                
                Loan
                
                
                ImpairmentBalance
                
                
                Allowance
                
                
                Balance
                
                
                AllowanceNon-accrual
      loans
                
                $
                2,575
                
                
                $
                255
                
                
                $
                5,001
                
                
                $
                -Accruing
      loans with an allowance
                
                
                10,009
                
                
                
                505
                
                
                
                19,962
                
                
                
                3,621Accruing
      loans without an allowance
                
                
                2,106
                
                
                
                -
                
                
                
                23,149
                
                
                
                -Total
                
                $
                14,690
                
                
                $
                760
                
                
                $
                48,112
                
                
                $
                3,621





The
dollar volume of commercial real estate loans reviewed for impairment
significantly increased from the end of 2008 to the end of 2009. As of the end
of 2009, the nonaccrual commercial real estate loans with impairments had been
written down to their estimated fair values, less costs to sell. Included in the
accruing loans that had impairments at the end of 2009, one in the Oxford,
Mississippi market had an outstanding balance of $9.761 million with an
impairment allowance of $1.405 million. Another significant loan with an
impairment allowance was a loan in the Niceville, Florida market with an
outstanding balance of $4.060 million and an impairment allowance of $870
thousand. The Mississippi loan was not past due at the end of the year and is
secured by retail stores while the Florida loan was over 30 days past due at the
end of the year and is secured by office space.


38





FIRST
M&F CORPORATION AND SUBSIDIARY





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:12/31/09
                  
                  $
                  123,254
                  
                  
                  $
                  3,119
                  
                  
                  $
                  901
                  
                  
                  $
                  25,655
                  
                  
                  $
                  38,71309/30/09
                  
                  
                  187,559
                  
                  
                  
                  6,124
                  
                  
                  
                  4,750
                  
                  
                  
                  44,447
                  
                  
                  
                  20,39506/30/09
                  
                  
                  208,956
                  
                  
                  
                  8,060
                  
                  
                  
                  1,750
                  
                  
                  
                  44,393
                  
                  
                  
                  18,37803/31/09
                  
                  
                  251,612
                  
                  
                  
                  22,388
                  
                  
                  
                  341
                  
                  
                  
                  32,375
                  
                  
                  
                  2,05912/31/08
                  
                  
                  255,655
                  
                  
                  
                  13,216
                  
                  
                  
                  3,227
                  
                  
                  
                  13,724
                  
                  
                  
                  3,999Loans
      secured by 1-4 family properties:12/31/09
                  
                  $
                  239,921
                  
                  
                  $
                  4,512
                  
                  
                  $
                  312
                  
                  
                  $
                  4,490
                  
                  
                  $
                  3,36209/30/09
                  
                  
                  242,010
                  
                  
                  
                  3,930
                  
                  
                  
                  263
                  
                  
                  
                  5,555
                  
                  
                  
                  2,40806/30/09
                  
                  
                  249,895
                  
                  
                  
                  4,106
                  
                  
                  
                  72
                  
                  
                  
                  6,227
                  
                  
                  
                  1,68403/31/09
                  
                  
                  249,119
                  
                  
                  
                  6,763
                  
                  
                  
                  169
                  
                  
                  
                  4,040
                  
                  
                  
                  38012/31/08
                  
                  
                  255,488
                  
                  
                  
                  5,819
                  
                  
                  
                  667
                  
                  
                  
                  2,725
                  
                  
                  
                  1,901Commercial
      real estate-secured loans:12/31/09
                  
                  $
                  440,560
                  
                  
                  $
                  12,555
                  
                  
                  $
                  1,208
                  
                  
                  $
                  5,001
                  
                  
                  $
                  2,61109/30/09
                  
                  
                  410,093
                  
                  
                  
                  10,110
                  
                  
                  
                  317
                  
                  
                  
                  8,976
                  
                  
                  
                  22006/30/09
                  
                  
                  390,813
                  
                  
                  
                  11,068
                  
                  
                  
                  379
                  
                  
                  
                  18,409
                  
                  
                  
                  19003/31/09
                  
                  
                  389,248
                  
                  
                  
                  5,153
                  
                  
                  
                  700
                  
                  
                  
                  11,769
                  
                  
                  
                  15212/31/08
                  
                  
                  406,886
                  
                  
                  
                  3,149
                  
                  
                  
                  553
                  
                  
                  
                  2,575
                  
                  
                  
                  883





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





(Dollars in thousands)
                    
                    December 31
                    
                    
                    December 31
                    
                    
                    December 312009
                    
                    
                    2008
                    
                    
                    2007Nonaccrual
      loans
                    
                    $
                    44,549
                    
                    
                    $
                    20,564
                    
                    
                    $
                    22,095Other
      real estate
                    
                    
                    23,578
                    
                    
                    
                    11,061
                    
                    
                    
                    7,191Investment
      securities
                    
                    
                    825
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      non-performing assets
                    
                    $
                    68,952
                    
                    
                    $
                    31,625
                    
                    
                    $
                    29,286Past
      due 90 days or more and still accruing interest
                    
                    $
                    2,479
                    
                    
                    $
                    5,686
                    
                    
                    $
                    634Restructured
      loans (accruing)
                    
                    
                    4,620
                    
                    
                    
                    3,664
                    
                    
                    
                    -Ratios:Nonaccrual
      loans to loans
                    
                    
                    4.17
                    %
                    
                    
                    1.74
                    %
                    
                    
                    1.82
                    %Past
      due 90 day loans to loans
                    
                    
                    .23
                    %
                    
                    
                    .48
                    %
                    
                    
                    .05
                    %Non-performing
      credit assets to loans and other real estate
                    
                    
                    6.24
                    %
                    
                    
                    2.65
                    %
                    
                    
                    2.40
                    %Non-performing
      assets to assets
                    
                    
                    4.15
                    %
                    
                    
                    1.98
                    %
                    
                    
                    1.78
                    %





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





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





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


39





FIRST
M&F CORPORATION AND SUBSIDIARY





Defined
Benefit Pension Plan





The
Company has a defined benefit pension plan that it froze in September 2001. For
accounting purposes, the plan’s funded status was a net liability of $801
thousand at the end of 2008. The plan had an unamortized actuarial loss of
$4.528 million that was recorded in stockholders’ equity within other
comprehensive income at the end of 2008. The actuarial loss balance is being
amortized against earnings on a straight-line basis through 2013. The Company
expects to terminate the plan in five to seven years.





During
2009, the plan experienced gains in its investment portfolio of $1.175 million.
These gains partially offset the losses of $2.364 million that were incurred in
2008. The funded status of the plan at the end of 2009 was a liability of $528
thousand. The unamortized actuarial loss balance decreased to $3.538 million at
the end of 2009, with four more years remaining in its amortizable life. The
amortization expense component of pension expense was $906 thousand in 2009 and
$326 thousand in 2008. It is expected to be $884 thousand for 2010.





Two
significant issues for the Company going forward are (1) how to adjust planned
contributions to the pension plan since it experienced a net funded deficit at
the end of 2008 and 2009 and (2) working with the higher expense level brought
about by the unamortized actuarial loss and the shortening of the time frame for
amortizing that loss against earnings. Management expects to manage pension
contributions with the desire to terminate the plan within the next five to
seven years. Management believes that the market will recover sufficiently in
2010 and beyond to reduce the unamortized actuarial loss by earning returns in
excess of expectations. However, during 2010 and likely into 2011 the Company
will experience pension expenses of approximately $800 thousand
annually.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity





Liquidity
is the ability of a bank to convert assets into cash and cash equivalents
without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Company’s ability to
meet day-to-day cash flow requirements of customers, whether they wish to
withdraw funds or to borrow funds to meet their capital needs. Historically,
deposit growth has been sufficient to provide for the Company’s liquidity needs.
The Company uses Federal Home Loan Bank borrowings to fund loan growth when
deposit volumes are insufficient. The Company has sufficient lines available
through the Federal Home Loan Bank and correspondent banks to meet all
anticipated liquidity needs. However, it is the Company’s strategy to balance
the use of deposits and debt as funding sources for asset growth.





The
asset/liability committee 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. The Company and its
bank subsidiary maintain secured lines of credit with correspondent banks, the
Federal Home Loan Bank and the Federal Reserve.





The
Company must obtain prior approval from the Federal Reserve Bank of St. Louis to
obtain new borrowings. The bank subsidiary is not subject to the Federal Reserve
approval requirement.





On
December 12, 2007, the Company’s Board of Directors authorized a stock
repurchase plan allowing for the purchase of up to 500,000 shares during the
period of January through December 2008. This plan was not renewed in
2009.





During
2008, the Company repurchased 7,500 shares, related to its 2008 repurchase
program, at an average price of $15.55 per share. The Board determined not to
renew the repurchase plan for an additional twelve month period at the end of
2008. Reacquired shares are held as authorized but unissued shares to be used
for general corporate purposes.





The
Company did not have any stock option exercises during 2009 or 2008. During
2007, the Company issued 19,854 shares related to stock option exercises, at an
average price of $15.37 per share.





The
resulting debt from the stock repurchase programs was paid through dividends
received by the Company from Merchants and Farmers Bank. The repurchase programs
did not have any negative effect on liquidity.


40





FIRST
M&F CORPORATION AND SUBSIDIARY





Interest
Rate Sensitivity





Interest
rate sensitivity is a function of the repricing characteristics of the Company’s
portfolio of assets and liabilities. Interest rate sensitivity management
focuses on repricing relationships of these assets and liabilities during
periods of changing market interest rates. Management seeks to minimize the
effect of interest rate movements on net interest income. 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. In addition to these monthly
reviews, a quarterly sensitivity analysis is performed to determine the
potential effects of changes in interest rates on the Company’s net interest
income and market value of equity. Cash flow analyses are also used to project
short-term interest rate risks and liquidity risks.





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.
At the end of 2009, the one-year repricing gap stood at -6.17% as compared to
+2.97% at the end of 2008. Factors influencing the change in the one-year
repricing gap from positive to negative were (1) a decrease in loan and
investment portfolio volumes, partially offset by a significant increase in
short-term liquid funds, (2) approximately 7% growth in interest-sensitive
deposits and (3) an increase in the amount of borrowings due, as the Company has
over 50% of its Federal Home Loan Bank borrowings due to mature in 2010.
According to interest-rate sensitivity analysis, the Company has low-to-moderate
interest rate risk.





Capital
Resources





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





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





Cumulative
dividends on the Class B, Series A Preferred Stock will accrue on the $1,000
liquidation preference at a rate of 5% per annum for the first five years, and
at a rate of 9% per annum thereafter but will be paid only if, as, and when
declared by the Company’s Board of Directors. The Class B, Series A Preferred
Stock has no maturity date and ranks senior to the Common Stock with respect to
the payment of dividends and distributions and amounts payable upon liquidation,
dissolution and winding up of the Company. The Class B, Series A Preferred Stock
is generally non-voting.





The
Company may redeem the Class B, Series A Preferred Stock in whole or in part at
$1,000 per share at any time, subject to the consent of the Federal Reserve Bank
of St. Louis, which is the Company’s primary Federal banking regulator, and the
U.S. Treasury Department.


41





FIRST
M&F CORPORATION AND SUBSIDIARY





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





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





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





The
Company repurchased 7,500 shares during 2008 at an average price of $15.55 per
share. The Company did not repurchase any shares during 2009. The Company did
not issue any shares upon the exercise of stock options during 2008 or
2009.





The
Company’s
stock is publicly traded on the NASDAQ Global Select Market, also providing an
avenue for additional capital if it is needed. The Company’s shares traded at a
rate of approximately 5,000 shares per day during 2009. There are two analysts
who follow the Company and issue earnings forecasts.





The ratio
of capital to assets stood at 6.29% at December 31, 2009, 8.51% at December 31,
2008, and 8.47% at December 31, 2007, with risk-based capital ratios in excess
of the regulatory requirements. The Company’s regulatory capital ratios for 2009
and 2008 are summarized in Note 20 – Regulatory Matters of the audited financial
statements included in Item 8, Financial Statements and Supplementary Data, in
this Form 10-K.


42





FIRST
M&F CORPORATION AND SUBSIDIARY





OFF-BALANCE
SHEET ARRANGEMENTS





The
Company’s primary off-balance sheet arrangements are in the form of loan
commitments and operating lease commitments. At December 31, 2009, the Company
had $145.335 million in unused loan commitments outstanding. Of these
commitments, $100.946 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 2009. At December
31, 2009, the Company had $3.336 million in financial standby letters of credit
issued and outstanding.





At
December 31, 2009, there were $100 thousand in standby letters of credit issued
on the Company’s behalf by a Federal Home Loan Bank. 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 uses these letters of credit primarily
to pledge to certain state and municipality deposits and occasionally as
additional collateral on loan participations sold and is obligated to the
Federal Home Loan Bank if the letters of credit must be drawn upon.





Liabilities
of $31 thousand at December 31, 2009, and $28 thousand at December 31, 2008, are
recognized in Other Liabilities related to the obligation to stand ready to
perform related to standby letters of credit.





The
Company makes commitments to originate mortgage loans that will be held for
sale. The total commitments to originate mortgages to be held for sale were
$7.108 million at December 31, 2009. These commitments are accounted for as
derivatives and are marked to fair value with changes in fair value recorded in
mortgage banking income.  At December 31, 2009, mortgage
origination-related derivatives with positive fair values of $8 thousand were
included in other assets and derivatives with negative fair values of $1
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 December 31, 2009, the Company
had $3.895 million in locked forward sales agreements in place. Forward
sale-related derivatives with positive fair values of $77 thousand were included
in other assets and no derivatives with negative fair values were included in
other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. The
Company may also be required to repurchase mortgages that do not conform to FNMA
or FHA underwriting standards or that contain critical documentation errors or
fraud. The Company has not sustained any recourse-related losses in its mortgage
program and the repurchase of mortgages has been an extremely rare event.
Mortgages sold that had not reached the first payment date were $8.093 million
at December 31, 2009. No recourse liability was recorded for these
mortgages.





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





The
Company is a guarantor of the First M&F Statutory Trust I to the extent that
if at any time the Trust is required to pay taxes, duties, assessments or
governmental charges of any kind, then the Company is required to pay to the
Trust additional sums to cover the required payments.





The
Company irrevocably and unconditionally guarantees, with respect to the Capital
Securities of the First M&F Statutory Trust I, and to the extent not paid by
the Trust, accrued and unpaid distributions on the Capital Securities and the
redemption price payable to the holders of the Capital
Securities.


43





FIRST
M&F CORPORATION AND SUBSIDIARY





TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS





The
following table summarizes the obligations of the Company:





(Dollars in thousands)
                    
                    Payments Due by PeriodLess
                    
                    
                    
                    
                    
                    
                    
                    
                    MoreThan 1
                    
                    
                    1 - 3
                    
                    
                    3 – 5
                    
                    
                    Than 5Contractual Obligations
                    
                    Total
                    
                    
                    Year
                    
                    
                    Years
                    
                    
                    Years
                    
                    
                    YearsLong-Term
      Debt
                    
                    $
                    122,510
                    
                    
                    $
                    76,197
                    
                    
                    $
                    13,098
                    
                    
                    $
                    21,748
                    
                    
                    $
                    11,467Junior
      Subordinated Debentures
                    
                    
                    30,928
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,928Capital
      Lease Obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Leases
                    
                    
                    3,983
                    
                    
                    
                    1,273
                    
                    
                    
                    1,109
                    
                    
                    
                    639
                    
                    
                    
                    962Purchase
      Obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      Long-Term Liabilities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    157,421
                    
                    
                    $
                    77,470
                    
                    
                    $
                    14,207
                    
                    
                    $
                    22,387
                    
                    
                    $
                    43,357





Long-term
debt obligations primarily represent borrowings from the Federal Home Loan Bank.
The junior subordinated debentures are redeemable beginning in March 2011.
Operating leases are primarily leases on office space and information
technology. Leases on office space range from those that are month-to-month to
120-month leases. Most leases have options to renew for periods equal to the
original term of the lease. Technology leases are all contractual and have
remaining lives of 12 to 60 months. There are no bargain purchase options in any
of the current leases.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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





(1)           Allowance
for loan losses


(2)           Fair
value


(3)           Goodwill,
intangible assets and related impairment


(4)           Contingent
liabilities


(5)           Income
taxes





Allowance for loan
losses





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





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





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


44





FIRST
M&F CORPORATION AND SUBSIDIARY





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 December 31, 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.





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





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





Goodwill, intangible assets
and related impairment





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





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





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





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





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.


45





FIRST
M&F CORPORATION AND SUBSIDIARY





Income
Taxes





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





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





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


46





FIRST
M&F CORPORATION AND SUBSIDIARY





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 being performed on the balance sheet and economic value of
equity. The following table shows the gap position of the Company at December
31, 2009, placing variable-rate instruments in the earliest repricing category
and including estimated prepayment activity for certain loans and
mortgage-backed securities. The gap positioning for deposits without maturities
are estimated using a combination of factors that include deposit product price
sensitivity estimates for increasing and decreasing rate periods. As the
assumptions made regarding non-maturity deposits heavily influence the interest
rate sensitivity analysis of the Company’s balance sheet, management frequently
reviews these inputs to best reflect current deposit market forces and industry
standards for monitoring these risk factors.





Rate Sensitivity Gap ReportAsofDecember31,2009(Dollars in thousands)
                  
                  0-12months
                  
                  
                  1-5years
                  
                  
                  Over5years
                  
                  
                  TotalShort-term
      funds
                  
                  $
                  154,810
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  154,810Investments
                  
                  
                  84,311
                  
                  
                  
                  143,094
                  
                  
                  
                  57,145
                  
                  
                  
                  284,550Loans
                  
                  
                  508,805
                  
                  
                  
                  484,602
                  
                  
                  
                  75,199
                  
                  
                  
                  1,068,606Total
      earning assets
                  
                  
                  747,926
                  
                  
                  
                  627,696
                  
                  
                  
                  132,344
                  
                  
                  
                  1,507,966NOW,
      MMDA & savings deposits
                  
                  
                  336,349
                  
                  
                  
                  25,763
                  
                  
                  
                  221,767
                  
                  
                  
                  583,879Time
      deposits
                  
                  
                  424,094
                  
                  
                  
                  151,711
                  
                  
                  
                  -
                  
                  
                  
                  575,805Short-term
      borrowings
                  
                  
                  8,642
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,642Other
      borrowings
                  
                  
                  81,479
                  
                  
                  
                  41,031
                  
                  
                  
                  30,928
                  
                  
                  
                  153,438Total
      int. bearing liabilities
                  
                  
                  850,564
                  
                  
                  
                  218,505
                  
                  
                  
                  252,695
                  
                  
                  
                  1,321,764Rate
      sensitive gap
                  
                  $
                  (102,638
                  )
                  
                  $
                  409,191
                  
                  
                  $
                  (120,351
                  )Cumulative
      gap
                  
                  $
                  (102,638
                  )
                  
                  $
                  306,553
                  
                  
                  $
                  186,202Cumulative
      % of assets
                  
                  
                  (6.17
                  )%
                  
                  
                  18.43
                  %
                  
                  
                  11.20
                  %





Interest
rate shock analysis shows that the Company will experience a .53% 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 .17% decrease in
net interest income.





An
analysis of the change in market value of equity shows how an interest rate
shock will affect the difference between the market value of assets and the
market value of liabilities. With all financial instruments being stated at
market value, the market value of equity will increase by 1.61% with an
immediate and sustained increase in interest rates of 200 basis points. The
market value of equity will decrease by 6.09% with an immediate and sustained
decrease in interest rates of 100 basis points.





The
Company has no hedging instruments in place at December 31,
2009.


47





FIRST
M&F CORPORATION AND SUBSIDIARY





FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Management
of First M&F Corporation and its subsidiary has prepared the consolidated
financial statements and other information in our Annual Report in accordance
with generally accepted accounting principles generally accepted in the United
States of America and is responsible for its accuracy. The financial statements
necessarily include amounts that are based on management’s best estimates and
judgments.





In
meeting its responsibility, management relies on internal accounting and related
control systems. The internal control systems are designed to ensure that
transactions are properly authorized and recorded in the Company’s financial
records and to safeguard the Company’s assets from material loss or misuse. Such
assurance cannot be absolute because of inherent limitations in any internal
control system. The Company’s bank subsidiary maintains an internal audit staff
which monitors compliance with the Company’s and Bank’s systems of internal
controls and reports to management and to the Audit Committee of the Board of
Directors.





The Audit
Committee of First M&F Corporation’s Board of Directors consists entirely of
outside directors. The Audit Committee meets periodically with the internal
auditor and the independent accountants to discuss audit, internal control,
financial reporting and related matters. The Company’s independent accountants
and the internal audit staff have direct access to the Audit
Committee.





First
M&F Corporation’s management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
management, including First M&F Corporation’s principal executive officer
and principal financial officer, the Company conducted an evaluation of the
effectiveness of internal control over financial reporting based on the
framework in Internal Control
– Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our evaluation included a review of
the documentation of controls, evaluations of the design of the internal control
system and tests of the effectiveness of internal controls.





Based on
First M&F Corporation’s evaluation under the framework in Internal Control – Integrated
Framework, management concluded that internal control over financial
reporting was effective as of December 31, 2009.





/s/ Hugh S. Potts, Jr.
                  
                  /s/ John G. CopelandHugh
      S. Potts, Jr.
                  John
      G. CopelandChairman
      and Chief Executive Officer
                  EVP
      and Chief Financial
Officer


48





FIRST
M&F CORPORATION AND SUBSIDIARY





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Audit
Committee, Board of Directors and Stockholders


First
M&F Corporation


Kosciusko,
Mississippi





We have
audited the accompanying consolidated statements of condition of First M&F
Corporation as of December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the years then ended.  The Company’s management is
responsible for these financial statements.  Our responsibility is to
express an opinion on these financial statements based on our
audits.  The consolidated financial statements of First M&F
Corporation as of December 31, 2007, and for the year ended December 31, 2007,
were audited by other auditors whose unqualified report dated February 22, 2008,
on those statements included an emphasis paragraph that described the change in
accounting principle discussed in note 18.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  Our
audits included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation.  We believe that our audits provide
a reasonable basis for our opinion.





In our
opinion, the 2009 and 2008 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
M&F Corporation as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.




/s/ BKD,
LLP




Jackson,
Mississippi


March 16, 2010




49




FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Condition


December
31, 2009 and 2008


(In
Thousands, Except Share Data)





2009
                  
                  
                  2008AssetsCash
      and due from banks
                  
                  $
                  42,446
                  
                  
                  $
                  47,738Interest-bearing
      bank balances
                  
                  
                  84,810
                  
                  
                  
                  6,556Federal
      funds sold
                  
                  
                  70,000
                  
                  
                  
                  9,350Securities
      available for sale, amortized cost of $280,470 and
$223,882
                  
                  
                  284,550
                  
                  
                  
                  227,145Loans
      held for sale
                  
                  
                  10,266
                  
                  
                  
                  7,698Loans,
      net of unearned income
                  
                  
                  1,058,340
                  
                  
                  
                  1,176,595Allowance
      for loan losses
                  
                  
                  (24,014
                  )
                  
                  
                  (24,918
                  )Net
      loans
                  
                  
                  1,034,326
                  
                  
                  
                  1,151,677Bank
      premises and equipment
                  
                  
                  42,919
                  
                  
                  
                  44,642Accrued
      interest receivable
                  
                  
                  7,598
                  
                  
                  
                  9,832Other
      real estate
                  
                  
                  23,578
                  
                  
                  
                  11,061Goodwill
                  
                  
                  -
                  
                  
                  
                  32,572Other
      intangible assets
                  
                  
                  5,439
                  
                  
                  
                  7,127Other
      assets
                  
                  
                  57,036
                  
                  
                  
                  41,467$
                  1,662,968
                  
                  
                  $
                  1,596,865Liabilities
      and Stockholders’ EquityLiabilities:Noninterest-bearing
      deposits
                  
                  $
                  228,579
                  
                  
                  $
                  178,689Interest-bearing
      deposits
                  
                  
                  1,159,684
                  
                  
                  
                  1,082,698Total
      deposits
                  
                  
                  1,388,263
                  
                  
                  
                  1,261,387Fed
      funds purchased and repurchase agreements
                  
                  
                  8,642
                  
                  
                  
                  9,728Other
      borrowings
                  
                  
                  122,510
                  
                  
                  
                  151,547Junior
      subordinated debt
                  
                  
                  30,928
                  
                  
                  
                  30,928Accrued
      interest payable
                  
                  
                  2,933
                  
                  
                  
                  3,537Other
      liabilities
                  
                  
                  5,062
                  
                  
                  
                  3,770Total
      liabilities
                  
                  
                  1,558,338
                  
                  
                  
                  1,460,897Stockholders’
      equity:Preferred
      stock:Class
      A; 1,000,000 shares authorized
                  
                  
                  -
                  
                  
                  
                  -Class
      B; 1,000,000 shares authorized; 30,000 shares issued
                  
                  
                  28,838
                  
                  
                  
                  -Common
      stock of $5.00 par value; 15,000,000 shares authorized: 9,069,346 and
      9,063,346 shares issued
                  
                  
                  45,347
                  
                  
                  
                  45,317Additional
      paid-in capital
                  
                  
                  31,926
                  
                  
                  
                  30,447Nonvested
      restricted stock awards
                  
                  
                  734
                  
                  
                  
                  780Retained
      earnings (deficit)
                  
                  
                  (2,595
                  )
                  
                  
                  60,133Accumulated
      other comprehensive income (loss)
                  
                  
                  379
                  
                  
                  
                  (727
                  )First
      M&F Corporation equity
                  
                  
                  104,629
                  
                  
                  
                  135,950Noncontrolling
      interest in subsidiaries
                  
                  
                  1
                  
                  
                  
                  18Total
      equity
                  
                  
                  104,630
                  
                  
                  
                  135,968$
                  1,662,968
                  
                  
                  $
                  1,596,865





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


50





FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Operations


Years
Ended December 31, 2009, 2008 and 2007


(In
Thousands, Except Share Data)





2009
                        
                        
                        2008
                        
                        
                        2007Interest
      income:Interest
      and fees on loans
                        
                        $
                        66,782
                        
                        
                        $
                        81,487
                        
                        
                        $
                        89,796Interest
      on loans held for sale
                        
                        
                        278
                        
                        
                        
                        299
                        
                        
                        
                        439Taxable
      investments
                        
                        
                        9,531
                        
                        
                        
                        9,023
                        
                        
                        
                        9,514Tax-exempt
      investments
                        
                        
                        2,105
                        
                        
                        
                        2,164
                        
                        
                        
                        1,798Federal
      funds sold
                        
                        
                        95
                        
                        
                        
                        182
                        
                        
                        
                        144Interest-bearing
      bank balances
                        
                        
                        42
                        
                        
                        
                        133
                        
                        
                        
                        225Total
      interest income
                        
                        
                        78,833
                        
                        
                        
                        93,288
                        
                        
                        
                        101,916Interest
      expense:Deposits
                        
                        
                        23,701
                        
                        
                        
                        32,255
                        
                        
                        
                        36,632Fed
      funds purchased and repurchase agreements
                        
                        
                        97
                        
                        
                        
                        327
                        
                        
                        
                        609Other
      borrowings
                        
                        
                        5,449
                        
                        
                        
                        6,717
                        
                        
                        
                        8,644Junior
      subordinated debt
                        
                        
                        1,992
                        
                        
                        
                        1,993
                        
                        
                        
                        1,991Total
      interest expense
                        
                        
                        31,239
                        
                        
                        
                        41,292
                        
                        
                        
                        47,876Net
      interest income
                        
                        
                        47,594
                        
                        
                        
                        51,996
                        
                        
                        
                        54,040Provision
      for loan losses
                        
                        
                        49,601
                        
                        
                        
                        19,734
                        
                        
                        
                        2,520Net
      interest income (expense) after provision for loan losses
                        
                        
                        (2,007
                        )
                        
                        
                        32,262
                        
                        
                        
                        51,520Noninterest
      income:Service
      charges on deposit accounts
                        
                        
                        10,976
                        
                        
                        
                        11,692
                        
                        
                        
                        10,962Mortgage
      banking income
                        
                        
                        1,823
                        
                        
                        
                        1,202
                        
                        
                        
                        1,491Agency
      commission income
                        
                        
                        3,881
                        
                        
                        
                        4,125
                        
                        
                        
                        4,148Trust
      and brokerage income
                        
                        
                        489
                        
                        
                        
                        585
                        
                        
                        
                        598Bank
      owned life insurance income
                        
                        
                        762
                        
                        
                        
                        615
                        
                        
                        
                        689Loss
      on extinguishment of debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (126
                        )Other
      income
                        
                        
                        2,412
                        
                        
                        
                        2,906
                        
                        
                        
                        3,595Securities
      gains (losses), net
                        
                        
                        456
                        
                        
                        
                        6
                        
                        
                        
                        (37
                        )Total
      investment other-than-temporary impairment losses
                        
                        
                        (3,527
                        )
                        
                        
                        -
                        
                        
                        
                        -Portion
      of loss recognized in other comprehensive income (before
      taxes)
                        
                        
                        2,698
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      investment impairment losses recognized
                        
                        
                        (829
                        )
                        
                        
                        -
                        
                        
                        
                        -Total
      noninterest income
                        
                        
                        19,970
                        
                        
                        
                        21,131
                        
                        
                        
                        21,320Noninterest
      expenses:Salaries
      and employee benefits
                        
                        
                        28,314
                        
                        
                        
                        28,954
                        
                        
                        
                        29,348Net
      occupancy expenses
                        
                        
                        4,614
                        
                        
                        
                        4,210
                        
                        
                        
                        3,841Equipment
      expenses
                        
                        
                        2,877
                        
                        
                        
                        3,594
                        
                        
                        
                        3,629Software
      and processing expenses
                        
                        
                        1,898
                        
                        
                        
                        2,072
                        
                        
                        
                        1,463Telecommunications
      expenses
                        
                        
                        1,043
                        
                        
                        
                        1,162
                        
                        
                        
                        1,091Marketing
      and business development expenses
                        
                        
                        1,351
                        
                        
                        
                        1,439
                        
                        
                        
                        1,705Foreclosed
      property expenses
                        
                        
                        7,283
                        
                        
                        
                        1,913
                        
                        
                        
                        552FDIC
      insurance assessments
                        
                        
                        3,276
                        
                        
                        
                        575
                        
                        
                        
                        139Goodwill
      impairment
                        
                        
                        32,572
                        
                        
                        
                        -
                        
                        
                        
                        -Intangible
      asset amortization and impairment
                        
                        
                        1,688
                        
                        
                        
                        485
                        
                        
                        
                        547Other
      expenses
                        
                        
                        10,956
                        
                        
                        
                        9,880
                        
                        
                        
                        9,058Total
      noninterest expenses
                        
                        
                        95,872
                        
                        
                        
                        54,284
                        
                        
                        
                        51,373Income
      (loss) before income taxes
                        
                        
                        (77,909
                        )
                        
                        
                        (891
                        )
                        
                        
                        21,467Income
      tax expense (benefit)
                        
                        
                        (18,104
                        )
                        
                        
                        (1,436
                        )
                        
                        
                        6,976Net
      income (loss)
                        
                        
                        (59,805
                        )
                        
                        
                        545
                        
                        
                        
                        14,491Net
      income (loss) attributable to noncontrolling interests
                        
                        
                        (6
                        )
                        
                        
                        19
                        
                        
                        
                        33Net
      income (loss) attributable to First M&F Corporation
                        
                        $
                        (59,799
                        )
                        
                        $
                        526
                        
                        
                        $
                        14,458Dividends
      and accretion on preferred stock
                        
                        
                        1,464
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      income (loss) applicable to common stock
                        
                        $
                        (61,263
                        )
                        
                        $
                        526
                        
                        
                        $
                        14,458Net
      income (loss) allocated to common shareholders
                        
                        $
                        (60,655
                        )
                        
                        $
                        522
                        
                        
                        $
                        14,278Earnings
      (loss) per share:Basic
                        
                        $
                        (6.69
                        )
                        
                        $
                        0.06
                        
                        
                        $
                        1.58Diluted
                        
                        
                        (6.69
                        )
                        
                        
                        0.06
                        
                        
                        
                        1.57





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


51





FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income


Years
Ended December 31, 2009, 2008 and 2007


(In
Thousands)





2009
                
                
                2008
                
                
                2007Net
      income (loss)
                
                $
                (59,805
                )
                
                $
                545
                
                
                $
                14,491Other
      comprehensive income:Unrealized
      gains (losses) on securities:Unrealized
      gains on securities available for sale arising during the period, net of
      tax of $1,482, $1,009, and $723
                
                
                2,489
                
                
                
                1,697
                
                
                
                1,213Unrealized
      losses on other-than-temporarily impaired securities available for sale
      arising during the period, net of tax of $1,316
                
                
                (2,211
                )
                
                
                -
                
                
                
                -Reclassification
      adjustment for (gains) losses on securities available for sale included in
      net income, net of tax of $170, $2, and $13
                
                
                (286
                )
                
                
                (4
                )
                
                
                24Reclassification
      adjustment for credit related other-than- temporary impairment losses on
      securities available for sale included in net income, net of tax of
      $309
                
                
                520
                
                
                
                -
                
                
                
                -Defined
      benefit pension plans:Net
      actuarial gains (losses) arising during the period, net of tax of $32,
      $1,113 and $203
                
                
                53
                
                
                
                (1,868
                )
                
                
                341Amortization
      of transition asset, net of tax of $3, $3 and $3
                
                
                (4
                )
                
                
                (6
                )
                
                
                (6
                )Amortization
      of prior service cost, net of tax of $14, $14 and $14
                
                
                (23
                )
                
                
                (23
                )
                
                
                (23
                )Amortization
      of actuarial loss, net of tax of $338, $122 and $156
                
                
                568
                
                
                
                204
                
                
                
                261Effects
      of changing the pension plan measurement date pursuant to change in
      accounting principle (charged to retained earnings):Amortization
      of transition asset, net of tax of $1
                
                
                -
                
                
                
                (1
                )
                
                
                -Amortization
      of prior service cost, net of tax of $3
                
                
                -
                
                
                
                (6
                )
                
                
                -Amortization
      of actuarial loss, net of tax of $30
                
                
                -
                
                
                
                51
                
                
                
                -Other
      comprehensive income
                
                
                1,106
                
                
                
                44
                
                
                
                1,810Total
      comprehensive income (loss)
                
                
                (58,699
                )
                
                
                589
                
                
                
                16,301Comprehensive
      income (loss) attributable to noncontrolling interests
                
                
                (6
                )
                
                
                19
                
                
                
                33Comprehensive
      income (loss) of First M&F Corp
                
                $
                (58,693
                )
                
                $
                570
                
                
                $
                16,268





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


52





FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Stockholders' Equity


Years
Ended December 31, 2009, 2008 and 2007


(In
Thousands, Except Share Data)





Nonvested
                              
                              
                              
                              
                              
                              AccumulatedAdditional
                              
                              
                              Restricted
                              
                              
                              Retained
                              
                              
                              OtherPreferred
                              
                              
                              Common
                              
                              
                              Paid-in
                              
                              
                              Stock
                              
                              
                              Earnings
                              
                              
                              Comprehensive
                              
                              
                              NoncontrollingStock
                              
                              
                              Stock
                              
                              
                              Capital
                              
                              
                              Awards
                              
                              
                              (Deficit)
                              
                              
                              Income
      (Loss)
                              
                              
                              Interest
                              
                              
                              TotalJanuary
      1, 2007
                              
                              $
                              -
                              
                              
                              $
                              45,231
                              
                              
                              $
                              30,315
                              
                              
                              $
                              375
                              
                              
                              $
                              54,707
                              
                              
                              $
                              (2,581
                              )
                              
                              $
                              18
                              
                              
                              $
                              128,065Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,458
                              
                              
                              
                              -
                              
                              
                              
                              33
                              
                              
                              
                              14,491Cash
      dividends - common ($.52 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,772
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,772
                              )19,854
      common shares issued in exercise of stock options
                              
                              
                              -
                              
                              
                              
                              99
                              
                              
                              
                              206
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              305Share-based
      compensation expense recognized
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              19
                              
                              
                              
                              298
                              
                              
                              
                              2
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              319Tax
      benefits on stock option transactions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              87
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              87Option
      cancellation payments
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (174
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (174
                              )1,500
      restricted share awards vested
                              
                              
                              -
                              
                              
                              
                              8
                              
                              
                              
                              22
                              
                              
                              
                              (30
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Net
      change
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,810
                              
                              
                              
                              -
                              
                              
                              
                              1,810Distributions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (33
                              )
                              
                              
                              (33
                              )December
      31, 2007
                              
                              $
                              -
                              
                              
                              $
                              45,338
                              
                              
                              $
                              30,475
                              
                              
                              $
                              643
                              
                              
                              $
                              64,395
                              
                              
                              $
                              (771
                              )
                              
                              $
                              18
                              
                              
                              $
                              140,098Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              526
                              
                              
                              
                              -
                              
                              
                              
                              19
                              
                              
                              
                              545Cash
      dividends - common ($.52 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,772
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,772
                              )7,500
      common shares repurchased
                              
                              
                              -
                              
                              
                              
                              (38
                              )
                              
                              
                              (80
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (118
                              )Share-based
      compensation expense recognized
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              9
                              
                              
                              
                              197
                              
                              
                              
                              3
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2093,266
      restricted share awards vested
                              
                              
                              -
                              
                              
                              
                              17
                              
                              
                              
                              43
                              
                              
                              
                              (60
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Net
      change
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Distributions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (19
                              )
                              
                              
                              (19
                              )Effects
      of change in accounting principle regarding pension plan measurement
      date:Interest
      cost, and expected return on plan assets for October 1- December 31, 2008
      net of tax of $15
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              25
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              25Amortization
      of prior service cost and transition asset for October 1- December 31,
      2008, net of tax of $26
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (44
                              )
                              
                              
                              44
                              
                              
                              
                              -
                              
                              
                              
                              -December
      31, 2008
                              
                              $
                              -
                              
                              
                              $
                              45,317
                              
                              
                              $
                              30,447
                              
                              
                              $
                              780
                              
                              
                              $
                              60,133
                              
                              
                              $
                              (727
                              )
                              
                              $
                              18
                              
                              
                              $
                              135,968Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (59,799
                              )
                              
                              
                              -
                              
                              
                              
                              (6
                              )
                              
                              
                              (59,805
                              )Cash
      dividends - common ($.16 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,466
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,466
                              )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
                              
                              
                              201
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,464
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,263
                              )6,000
      restricted share awards vested
                              
                              
                              -
                              
                              
                              
                              30
                              
                              
                              
                              71
                              
                              
                              
                              (101
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Share-based
      compensation expense recognized
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              17
                              
                              
                              
                              55
                              
                              
                              
                              1
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              73Tax
      benefits on restricted stock dividends paid
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              28
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              28Net
      change
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,106
                              
                              
                              
                              -
                              
                              
                              
                              1,106Distributions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (11
                              )
                              
                              
                              (11
                              )December
      31, 2009
                              
                              $
                              28,838
                              
                              
                              $
                              45,347
                              
                              
                              $
                              31,926
                              
                              
                              $
                              734
                              
                              
                              $
                              (2,595
                              )
                              
                              $
                              379
                              
                              
                              $
                              1
                              
                              
                              $
                              104,630





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


53





FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2009, 2008 and 2007


(In
Thousands)





2009
                
                
                2008
                
                
                2007Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (59,805
                )
                
                $
                545
                
                
                $
                14,491Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Share-based
      compensation
                
                
                73
                
                
                
                209
                
                
                
                319Amortization
      of pension costs
                
                
                878
                
                
                
                121
                
                
                
                279Depreciation
      and amortization
                
                
                3,281
                
                
                
                3,373
                
                
                
                3,271Goodwill
      impairment
                
                
                32,572
                
                
                
                -
                
                
                
                -Intangible
      asset impairments
                
                
                1,248
                
                
                
                -
                
                
                
                -Provision
      for loan losses
                
                
                49,601
                
                
                
                19,734
                
                
                
                2,520Net
      investment amortization (accretion)
                
                
                1,178
                
                
                
                (122
                )
                
                
                (343
                )Net
      change in unearned fees/deferred costs on loans
                
                
                (243
                )
                
                
                (496
                )
                
                
                116Capitalized
      dividends on FHLB stock
                
                
                (19
                )
                
                
                (237
                )
                
                
                (382
                )Net
      accretion of discount on time deposits
                
                
                19
                
                
                
                38
                
                
                
                68Net
      accretion of discount on debt
                
                
                -
                
                
                
                5
                
                
                
                -Loss
      on extinguishment of debt
                
                
                -
                
                
                
                -
                
                
                
                126Loss
      (gain) on securities available for sale
                
                
                (456
                )
                
                
                (6
                )
                
                
                37Impairment
      loss on securities available for sale
                
                
                829
                
                
                
                -
                
                
                
                -Gains
      on loans held for sale
                
                
                (1,006
                )
                
                
                (831
                )
                
                
                (906
                )Other
      asset sale losses
                
                
                5,046
                
                
                
                1,281
                
                
                
                224Deferred
      income taxes
                
                
                (10,855
                )
                
                
                (3,670
                )
                
                
                2,192Originations
      of loans held for sale, net of repayments
                
                
                (107,959
                )
                
                
                (67,955
                )
                
                
                (81,025
                )Sales
      proceeds of loans held for sale
                
                
                106,348
                
                
                
                66,582
                
                
                
                83,653(Increase)
      decrease in:Accrued
      interest receivable
                
                
                2,234
                
                
                
                2,602
                
                
                
                156Cash
      surrender value of bank owned life insurance
                
                
                (762
                )
                
                
                (615
                )
                
                
                (689
                )Other
      assets
                
                
                1,086
                
                
                
                1,638
                
                
                
                (2,898
                )Increase
      (decrease) in:Accrued
      interest payable
                
                
                (604
                )
                
                
                (1,614
                )
                
                
                367Other
      liabilities
                
                
                (4,893
                )
                
                
                (2,207
                )
                
                
                (1,596
                )Net
      cash provided by operating activities
                
                
                17,791
                
                
                
                18,375
                
                
                
                19,980Cash
      flows from investing activities:Purchases
      of securities available for sale
                
                
                (142,697
                )
                
                
                (89,503
                )
                
                
                (46,356
                )Sales
      of securities available for sale
                
                
                17,240
                
                
                
                6,878
                
                
                
                6,574Maturities
      of securities available for sale
                
                
                67,318
                
                
                
                95,446
                
                
                
                66,751Net
      (increase) decrease in:Interest-bearing
      bank balances
                
                
                (78,254
                )
                
                
                (3,076
                )
                
                
                210Federal
      funds sold
                
                
                (60,650
                )
                
                
                (7,350
                )
                
                
                (2,000
                )Loans
                
                
                21,506
                
                
                
                20,986
                
                
                
                (141,252
                )Bank
      premises and equipment
                
                
                (1,061
                )
                
                
                (1,867
                )
                
                
                (7,098
                )Net
      benefits received (purchases) of bank owned life insurance
                
                
                202
                
                
                
                (78
                )
                
                
                (58
                )Sales
      of nonperforming loans
                
                
                6,350
                
                
                
                -
                
                
                
                -Proceeds
      from sales of other real estate and other repossessed
    assets
                
                
                22,528
                
                
                
                7,038
                
                
                
                2,673Net
      (purchases) redemptions, of FHLB and FRB stock
                
                
                225
                
                
                
                2,382
                
                
                
                (1,288
                )Net
      cash paid in acquisitions
                
                
                -
                
                
                
                -
                
                
                
                (46
                )Net
      cash provided by (used in) investing activities
                
                
                (147,293
                )
                
                
                30,856
                
                
                
                (121,890
                )


54





FIRST
M&F CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2009, 2008 and 2007


(In
Thousands)





2009
                
                
                2008
                
                
                2007Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                
                
                126,857
                
                
                
                (1,106
                )
                
                
                76,405Net
      increase (decrease) in short-term borrowings
                
                
                (1,086
                )
                
                
                52
                
                
                
                (9,936
                )Proceeds
      from other borrowings
                
                
                20,000
                
                
                
                200,500
                
                
                
                601,800Repayments
      of other borrowings
                
                
                (49,037
                )
                
                
                (250,270
                )
                
                
                (567,325
                )Earnings
      distributions to noncontrolling interests
                
                
                (11
                )
                
                
                (19
                )
                
                
                (33
                )Common
      dividends paid
                
                
                (1,466
                )
                
                
                (4,772
                )
                
                
                (4,772
                )Preferred
      dividends paid
                
                
                (1,075
                )
                
                
                -
                
                
                
                -Preferred
      shares and common stock warrant issued to U.S. Treasury
                
                
                30,000
                
                
                
                -
                
                
                
                -Common
      shares issued
                
                
                -
                
                
                
                -
                
                
                
                305Common
      shares repurchased
                
                
                -
                
                
                
                (118
                )
                
                
                -Payments
      to cancel stock options
                
                
                -
                
                
                
                -
                
                
                
                (174
                )Tax
      benefits related to share-based compensation
                
                
                28
                
                
                
                -
                
                
                
                87Net
      cash provided by (used in) financing activities
                
                
                124,210
                
                
                
                (55,733
                )
                
                
                96,357Net
      decrease in cash and due from banks
                
                
                (5,292
                )
                
                
                (6,502
                )
                
                
                (5,553
                )Cash
      and due from banks at January 1
                
                
                47,738
                
                
                
                54,240
                
                
                
                59,793Cash
      and due from banks at December 31
                
                $
                42,446
                
                
                $
                47,738
                
                
                $
                54,240Total
      interest paid
                
                $
                31,852
                
                
                $
                42,870
                
                
                $
                47,438Total
      income taxes paid
                
                
                69
                
                
                
                3,435
                
                
                
                7,163Income
      tax refunds received
                
                
                1,249
                
                
                
                23
                
                
                
                400Total
      payments to other banks to satisfy liens on ORE
                
                
                88
                
                
                
                300
                
                
                
                575Transfers
      of loans to foreclosed property
                
                
                40,048
                
                
                
                13,031
                
                
                
                5,615U.S.
      Treasury preferred dividend accrued but unpaid
                
                
                188
                
                
                
                -
                
                
                
                -Accretion
      on U.S. Treasury preferred stock
                
                
                201
                
                
                
                -
                
                
                
                -





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


55





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 1:  Summary
of Significant Accounting Policies





The
accounting and reporting policies of First M&F Corporation (the Company)
which materially affect the determination of financial position and results of
operations conform to accounting principles generally accepted in the United
States of America and general practices within the banking industry. A summary
of these significant accounting and reporting policies is presented
below.





Organization and
Operations





The
Company is a one-bank holding company that owns 100% of the common stock of
Merchants and Farmers Bank (the Bank) of Kosciusko, Mississippi. The Bank is a
commercial bank and provides a full range of banking services through its
offices in Mississippi, Alabama, Tennessee and Florida. The Bank provides
brokerage and insurance services through its offices in Mississippi. As a state
chartered commercial bank, the Bank is subject to the regulations of certain
Federal and state agencies and undergoes periodic examinations by those
regulatory authorities.





Principles of
Consolidation





The
consolidated financial statements of First M&F Corporation include the
accounts of the Company and its wholly owned subsidiary, Merchants and Farmers
Bank, and the accounts of the Bank's wholly owned inactive finance subsidiary,
credit insurance subsidiary, general insurance agency subsidiaries, real estate
subsidiary, asset-based lending subsidiary and 55% owned title insurance agency.
All significant intercompany balances and transactions have been eliminated in
consolidation.





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





Reclassifications





Certain
immaterial items within the accompanying financial statements for previous years
have been reclassified to conform to the 2009 presentation. These
reclassifications had no effect on net earnings or stockholders’
equity.





Subsequent
Events





Financial
statements are considered available to be issued when they are complete in a
form and format that complies with accounting principles generally accepted in
the United States of America and all approvals necessary for issuance have been
obtained. Management has evaluated all events or transactions that occurred
after December 31, 2009 up through the date that these financial statements were
issued. No material subsequent events have occurred during this period that
required recognition or disclosure in these financial statements.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about future economic and market conditions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Although our estimates and assumptions contemplate current
economic conditions and how we expect them to change in the future, it is
reasonably possible that in 2010 actual conditions could be worse than those
anticipated, which could materially affect our financial condition and results
of operations. The allowance for loan losses, goodwill impairment and
other-than-temporary investment impairments represent significant
estimates.





Comprehensive
Income





Comprehensive
income includes net income reported in the statements of operations and net
changes in stockholders’ equity arising from activity with non-owners.
Components of accumulated other comprehensive income (loss) for the Company are:
(1) changes in unrealized gain (loss) on securities available for sale and (2)
actuarial and other changes in net unamortized pension costs.





Fair Value
Measurements





Fair
values of financial instruments are based upon quoted market prices, where
available. If such quoted market prices are not available, fair value is based
upon models that use observable market information as well as unobservable
estimates and adjustments based upon the inputs that management believes that
market participants would use. Certain assets and liabilities are accounted for
at fair value on a recurring basis. Changes in fair value for these assets and
liabilities are recorded in the statement of operations or in other
comprehensive income as prescribed by applicable accounting
standards.


56




FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
1:  (Continued)





Securities Available for
Sale





Securities
which are available to be sold prior to maturity are classified as securities
available for sale and are recorded at fair value. Unrealized holding gains and
losses are reported net of deferred income taxes as a separate component of
stockholders' equity.





Premiums
and discounts are amortized or accreted over the life of the related security
using the interest method. Interest income is recognized when earned. Securities
for which interest payments are past due are placed in nonaccrual status with
interest income being recognized as interest payments are received.





Realized
gains and losses on securities available for sale are included in earnings and
are determined using the specific amortized cost of the securities sold.
Declines in fair value of available-for-sale securities below their amortized
cost basis that are deemed to be other than temporary are reflected in earnings
as realized losses; however, for debt securities, if the Company does not have
the intent to sell the security and it is more likely than not that it will not
be required to sell the security before recovery of its amortized cost basis,
then only the amount of the unrealized loss that is determined to be a credit
loss is reflected in earnings. The remaining unrealized loss that is due to
non-credit factors is reflected in other comprehensive income. In estimating
other-than-temporary impairment losses, management considers, among other
things, (1) the length of time and the 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, (4) changes in credit ratings of the issuers and (5)
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 expected cash flow analysis prescribed by applicable accounting standards as
well as its intent related to the disposition of its investment to determine
whether an other-than-temporary impairment exists.





Loans Held for
Sale





Loans
held for sale, consisting primarily of mortgages and student loans, are
accounted for at the lower of cost or fair value applied on an individual loan
basis. Valuation changes are recorded in mortgage banking income or other
income.





Loans Held for
Investment





Loans
held for investment are stated at the principal amount outstanding, net of
unearned income and an allowance for loan losses. Interest on loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. Loan origination fees and direct loan origination
costs are deferred and recognized over the life of the related loans as
adjustments to interest income.





The Bank
discontinues the accrual of interest on loans and recognizes income only as
received (places the loans in nonaccrual status) when, in the judgment of
management, the collection of interest, but not necessarily principal, is
doubtful. Accrued interest is charged against interest income on loans when they
are placed in nonaccrual status.





A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Bank measures impaired and
restructured loans at the present value of expected future cash flows,
discounted at the loan's effective interest rate, or the fair value of
collateral if the loan is collateral dependent. Interest on impaired loans is
recorded on a cash basis if the loans are in nonaccrual status.





Allowance and Provision for
Loan Losses





The
allowance for loan losses is established through provisions for loan losses
charged against earnings. Loans deemed to be uncollectible are charged against
the allowance for loan losses, and subsequent recoveries, if any, are credited
to the allowance.





The
allowance for loan losses is maintained at a level believed to be adequate by
management to absorb estimated probable loan losses.  Management’s
periodic evaluation of the adequacy of the allowance for loan losses is based on
estimated credit losses for specifically identified impaired loans as well as
estimated probable credit losses inherent in the remainder of the loan portfolio
based on historical loss rates.  The fundamental tool used by
management to estimate impairments and contingency reserves is the individual
loan risk rate. Management considers a number of factors in assigning risk rates
to individual loans, including: historical loan loss experience for various
types of loans, past due trends, current trends, current economic conditions,
industry exposure, internal and external loan reviews, loan risk, loan
performance, the estimated value of underlying collateral, evaluation of a
borrower’s financial condition and other factors considered relevant in grading
loans.





Management’s
evaluation of the allowance for loan losses is inherently subjective as it
requires material estimates. The actual amounts of loan losses realized in the
near term could differ from the amounts estimated in arriving at the allowance
for loan losses reported in the financial statements.





Bank Premises and
Equipment





Bank
premises and equipment are stated at cost less accumulated depreciation and
amortization. Provisions for depreciation and amortization are computed
principally using the straight-line method and charged to operating expenses
over the estimated useful lives of the assets. Costs of major additions and
improvements are capitalized and subsequently depreciated over their estimated
useful lives. Expenditures for maintenance and repairs are charged to expense as
incurred.


57





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
1:  (Continued)





Other Real
Estate





Other
real estate acquired through partial or total satisfaction of loans is carried
at the lower of fair value, net of estimated costs to sell, or cost. The
original cost of other real estate is recognized as the lesser of fair value of
the property, net of estimated costs to sell, or the recorded loan balance at
the date of acquisition (foreclosure). Any loss incurred at the date of
acquisition is charged to the allowance for loan losses. Gains or losses
incurred subsequent to the date of acquisition are reported in current
operations. Related operating income and expenses are reported in current
operations.





Intangible
Assets





Goodwill
represents the excess of the cost of other entities acquired over the fair value
of the net assets acquired. Goodwill and intangible assets that have indefinite
lives are not amortized, but are tested for impairment annually and when there
is an impairment indicator. An impairment indicator is an event or change in
circumstances that would more likely than not reduce the fair value of a
reporting unit below its carrying value. Goodwill impairment losses are reported
as a separate line item in the Company’s statement of operations.





Intangible
assets with determinable useful lives such as core deposit intangibles, customer
renewal lists and noncompete agreements are amortized over their estimated
respective useful lives. Intangible assets with determinable useful lives are
tested for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable from future
undiscounted cash flows. If impaired, these intangible assets are recorded at
fair value.





Income
Taxes





The
Company, the Bank and the Bank's wholly owned subsidiaries, except for the
credit insurance subsidiary, file consolidated Federal and state income tax
returns. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. Deferred income tax expenses (benefits)
result from changes in deferred tax assets and liabilities between reporting
periods. A valuation allowance, if needed, reduces deferred tax assets to the
expected amount most likely to be realized. Realization of deferred tax assets
is dependent upon the generation of a sufficient level of future taxable income
and recoverable taxes paid in prior years. Interest assessed by the taxing
authorities is classified as interest expense and penalties are classified as
income tax expense in the statement of operations.





Contingent
Liabilities





Contingent
liabilities, including claims and legal actions arising in the ordinary course
of business are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.





Concentrations of
Credit





Substantially
all of the Company’s loans, commitments and standby and commercial letters of
credit have been granted to borrowers who are customers in the Company’s market
area. As a result, the Company is subject to this concentration of credit risk.
A substantial portion of the loan portfolio, as presented in Note 4, is
represented by loans collateralized by real estate. The ability of the borrowers
to honor their contracts is dependent upon the real estate market and general
economic conditions in the Company’s market area.


58





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
1:  (Continued)





Recent
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 way 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 became effective
for and are included in the Company’s financial statements for the year-ended
December 31, 2009 in Note 18 – Employee Benefit Plans.





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.”


59





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
1:  (Continued)





Recent
Pronouncements




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 statement of operations, 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 effect 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 hedged 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 became effective for the Company’s financial statements beginning
October 1, 2009 and did not have a significant impact on the Company’s
financial statements.


60





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
1:  (Continued)





Recent
Pronouncements




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.





Note 2:  Fair
Value





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





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





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





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


61





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





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





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





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
                
                
                $
                517
                
                
                $
                226,628
                
                
                $
                -Mortgage
      derivative assets
                
                
                45
                
                
                
                -
                
                
                
                45
                
                
                
                -Mortgage
      derivative liabilities
                
                
                27
                
                
                
                -
                
                
                
                27
                
                
                
                -


62





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





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





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





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





Collateralized debt
obligations. The Company owns certain beneficial interests in
collateralized debt obligations secured by community bank trust preferred
securities. These interests have an amortized cost of $4.171 million with
estimated fair values of $1.080 million. These interests do not trade in a
liquid market, and therefore, market quotes are not a reliable indicator of
their ultimate realizability. The Company utilizes a discounted cash flow model
using inputs of (1) market yields of trust-preferred securities as the discount
rate and (2) expected cash flows which are estimated using assumptions related
to defaults, deferrals and prepayments to determine the fair values of these
beneficial interests. Many of the factors that adjust the timing and extent of
cash flows are based on judgment and not directly observable in the markets.
Therefore, these fair values are classified as Level 3 valuations for accounting
and disclosure purposes.


63





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





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





Mortgage
Derivatives.  Throughout 2008 and 2009 mortgage derivative
assets and liabilities were reported at fair value utilizing Level 2 inputs.
These assets and liabilities represent the fair values of the 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. The most significant inputs used through 2008 and
2009 were dealer quotes. During the fourth quarter of 2009 the model for forward
sale derivatives was changed to supplement the dealer quotes with estimates of
servicing values. The model for origination derivatives was adjusted to use
estimated pull-through rates. Therefore, these instruments were transferred to
Level 3 status upon their valuations at December 31, 2009.  Mortgage
derivative assets are included in other assets and mortgage derivative
liabilities are included in other liabilities in the Company’s balance
sheet.





The
following table reports the activity for 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)CollateralizedDebt
                      
                      
                      MortgageObligations
                      
                      
                      DerivativesBalance
      at January 1, 2009
                      
                      $
                      -
                      
                      
                      $
                      -Total
      gains or losses (realized/unrealized)Other-than-temporary
      impairment included in earnings
                      
                      
                      (829
                      )
                      
                      
                      -Other-than-temporary
      impairment included in other comprehensive income
                      
                      
                      (2,698
                      )
                      
                      
                      -Other
      gains/losses included in other comprehensive income
                      
                      
                      641
                      
                      
                      
                      -Purchases,
      issuances, and settlements
                      
                      
                      -
                      
                      
                      
                      -Transfers
      in and/or out of Level 3
                      
                      
                      3,966
                      
                      
                      
                      84Balance
      at December 31, 2009
                      
                      $
                      1,080
                      
                      
                      $
                      84The
      amount of total gains or losses for the period includedin earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                      
                      $
                      (829
                      )
                      
                      $
                      97


64





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





The
following tables summarize assets and liabilities measured at fair value on a
nonrecurring basis as of December 31, 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
                  
                  
                  RecognizedYear-to-Date
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  for Loan Losses
                  
                  
                  In EarningsEnded
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  During
                  
                  
                  During(Dollars in thousands)
                  
                  12/31/09 (a)
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Current Period
                  
                  
                  Current PeriodImpaired
      loans
                  
                  $
                  47,146
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  47,146
                  
                  
                  $
                  -
                  
                  
                  $
                  (42,368
                  )Loan
      foreclosures
                  
                  
                  17,899
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  17,899
                  
                  
                  
                  12,025
                  
                  
                  
                  -Loans
      transferred to HFS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,189
                  
                  
                  
                  -Bankers
      bank stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (78
                  )Other
      real estate
                  
                  
                  11,464
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,464
                  
                  
                  
                  -
                  
                  
                  
                  (3,509
                  )Goodwill
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (32,572
                  )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 value re-measurements took place during the period.
      Loan foreclosures represent the fair value portion of the carrying amounts
      of other real estate properties that were re-measured at the point of
      foreclosure during the period and were still owned at the balance sheet
      date.





Gains and
losses recognized due to fair value re-measurements are recorded in the
consolidated statements of operations in (1) provision for loan losses for
impaired loans, (2) other income for the bankers bank stock, (3) foreclosed
property expenses for other real estate, (4) goodwill impairment expense for
goodwill and (5) intangible asset amortization and impairment expense 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. For collateral dependent loans,
collateral values are estimated using Level 3 inputs based on observable market
data.


65





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





Loan
Foreclosures.  During 2009 certain foreclosed assets, upon
initial recognition, were re-measured and reported at fair value through a
charge-off to the allowance for possible loan losses based upon the fair value
of the foreclosed asset. The fair value of a foreclosed asset, upon initial
recognition, is estimated using Level 3 inputs based on observable market data.
Foreclosed assets measured at fair value upon initial recognition during 2009
totaled $34.463 million using Level 3 valuation inputs. In connection with the
measurement and initial recognition of the foregoing foreclosed assets, the
Company recognized charge-offs to the allowance for possible loan losses
totaling $17.390 million. During 2009 sales of these properties, net of
expenditures on improvements, were $14.648 million. Of the properties remaining
at the end of 2009, fair value write downs of $1.916 million had been taken
subsequent to foreclosure. The fair value of the foreclosed assets was recorded
in other real estate.





Loans Transferred To Held For
Sale.  Certain nonperforming loans held for investment were
transferred to held for sale status during 2009. Loans with an amortized cost of
$9.539 million were written down by $3.189 million to a fair value of $6.350
million upon transfer to held for sale status. The $3.189 million write-down was
charged to the allowance for loan losses. The loans were subsequently sold for
$6.350 million.





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 $4.101 million
were recorded during 2009 on properties with original carrying values of $18.643
million. Properties with carrying values of $3.078 million that had been written
down during 2009 were disposed of during 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 and again at December 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 to $2.21 per share at December 31, 2009 and as the Company
continued to accrue for sizeable losses in the real estate construction loan
portfolio during the first quarter and again during the fourth quarter. 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 applicable accounting principles. 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 at March 31, 2009,
which had a carrying value of $32.572 million, was estimated to be $16.772
million, requiring an impairment charge of $15.800 million. The implied fair
value of goodwill at December 31, 2009, which had a carrying value of $16.772
million, was estimated to be zero, requiring an impairment charge of $16.772
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 expense 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.


66





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





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 December 31, 2009 and December 31, 2008:





December 31, 2009
                    
                    
                    December 31, 2008(Dollars in thousands)
                    
                    Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    EstimatedAmount
                    
                    
                    Fair Value
                    
                    
                    Amount
                    
                    
                    Fair ValueFinancial
      assets:Cash
      and short-term investments
                    
                    $
                    197,256
                    
                    
                    $
                    197,256
                    
                    
                    $
                    63,644
                    
                    
                    $
                    63,644Securities
      available for sale
                    
                    
                    284,550
                    
                    
                    
                    284,550
                    
                    
                    
                    227,145
                    
                    
                    
                    227,145Loans
      held for sale
                    
                    
                    10,266
                    
                    
                    
                    10,270
                    
                    
                    
                    7,698
                    
                    
                    
                    7,757Loans
      held for investment
                    
                    
                    1,034,326
                    
                    
                    
                    996,382
                    
                    
                    
                    1,151,677
                    
                    
                    
                    1,111,202Agency
      accounts receivable
                    
                    
                    357
                    
                    
                    
                    357
                    
                    
                    
                    276
                    
                    
                    
                    276Accrued
      interest receivable
                    
                    
                    7,598
                    
                    
                    
                    7,598
                    
                    
                    
                    9,832
                    
                    
                    
                    9,832Nonmarketable
      equity investments
                    
                    
                    7,326
                    
                    
                    
                    7,326
                    
                    
                    
                    7,610
                    
                    
                    
                    7,610Investment
      in unconsolidated VIE
                    
                    
                    928
                    
                    
                    
                    928
                    
                    
                    
                    928
                    
                    
                    
                    928Mortgage
      derivative assets
                    
                    
                    85
                    
                    
                    
                    85
                    
                    
                    
                    45
                    
                    
                    
                    45Financial
      liabilities:Noninterest-bearing
      deposits
                    
                    
                    228,579
                    
                    
                    
                    228,579
                    
                    
                    
                    178,689
                    
                    
                    
                    178,689NOW,
      MMDA and savings deposits
                    
                    
                    583,879
                    
                    
                    
                    583,879
                    
                    
                    
                    513,979
                    
                    
                    
                    513,979Certificates
      of deposit
                    
                    
                    575,805
                    
                    
                    
                    580,895
                    
                    
                    
                    568,719
                    
                    
                    
                    579,874Short-term
      borrowings
                    
                    
                    8,642
                    
                    
                    
                    8,642
                    
                    
                    
                    9,728
                    
                    
                    
                    9,728Other
      borrowings
                    
                    
                    122,510
                    
                    
                    
                    124,021
                    
                    
                    
                    151,547
                    
                    
                    
                    153,295Junior
      subordinated debt
                    
                    
                    30,928
                    
                    
                    
                    15,835
                    
                    
                    
                    30,928
                    
                    
                    
                    36,617Agency
      accounts payable
                    
                    
                    639
                    
                    
                    
                    639
                    
                    
                    
                    574
                    
                    
                    
                    574Accrued
      interest payable
                    
                    
                    2,933
                    
                    
                    
                    2,933
                    
                    
                    
                    3,537
                    
                    
                    
                    3,537Mortgage
      derivative liabilities
                    
                    
                    1
                    
                    
                    
                    1
                    
                    
                    
                    27
                    
                    
                    
                    27Other
      financial instruments:Commitments
      to extend credit and letters of credit
                    
                    
                    (31
                    )
                    
                    
                    (400
                    )
                    
                    
                    (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. These prices include exchange quoted prices, dealer quoted prices and
prices derived from market yields published by specialized financial database
providers. We use the one price per instrument provided for the securities that
the service can produce prices for. We do not adjust the prices that are
obtained from external pricing services. Typically, all securities except for
some small municipal issues and the collateralized debt obligations are priced
by the primary external provider. For issues that are not priced by the primary
provider, we use the pricing disclosed in the investment accounting product
provided by a broker-dealer affiliate of a correspondent bank. The
broker-dealer’s accounting system uses prices provided by (1) the same external
pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with
market yield inputs provided by Bloomberg and a municipal securities market data
provider and (4) the broker-dealer’s trading staff. Any quotes provided by a
broker-dealer are usually non-binding. However, the Company rarely uses
solicited broker-dealer quotes to price any of its securities. The broker-dealer
prices all municipal securities through its pricing matrix. At December 31,
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) discount
margins based on current market activity and (2) cash flows based upon
contractual amounts adjusted for expected defaults, expected deferrals and
expected prepayments. Expected defaults and deferrals are determined through a
credit analysis of and risk rating assignment to each obligor of the collateral
that funds the investment vehicles. Most of these inputs are not directly
observable in the market, resulting in the fair values being classified as Level
3 valuations within the fair value accounting hierarchy.


67





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





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





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





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





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





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





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





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





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





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





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





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





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





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


68





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
2:  (Continued)





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





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





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





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


69





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
3:  Securities Available for Sale





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





Amortized
                  
                  
                  Gross Unrealized
                  
                  
                  Fair(Dollars in thousands)
                  
                  Cost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueDecember
      31, 2009:U.S.
      Treasury securities
                  
                  $
                  503
                  
                  
                  $
                  14
                  
                  
                  $
                  -
                  
                  
                  $
                  517U.S.
      Government sponsored entities
                  
                  
                  54,746
                  
                  
                  
                  489
                  
                  
                  
                  74
                  
                  
                  
                  55,161Mortgage-backed
      investments
                  
                  
                  162,647
                  
                  
                  
                  5,300
                  
                  
                  
                  72
                  
                  
                  
                  167,875Obligations
      of states and political subdivisions
                  
                  
                  55,153
                  
                  
                  
                  1,533
                  
                  
                  
                  100
                  
                  
                  
                  56,586Collateralized
      debt obligations
                  
                  
                  4,171
                  
                  
                  
                  -
                  
                  
                  
                  3,091
                  
                  
                  
                  1,080Other
      debt securities
                  
                  
                  2,385
                  
                  
                  
                  101
                  
                  
                  
                  -
                  
                  
                  
                  2,486Equity
      securities
                  
                  
                  865
                  
                  
                  
                  20
                  
                  
                  
                  40
                  
                  
                  
                  845$
                  280,470
                  
                  
                  $
                  7,457
                  
                  
                  $
                  3,377
                  
                  
                  $
                  284,550December
      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
                  
                  
                  $
                  227,145





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 December 31, 2009, and 2008.





(Dollars in thousands)
                                    
                                    Less Than 12 Months
                                    
                                    
                                    12 Months or More
                                    
                                    
                                    TotalFair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    UnrealizedValue
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    LossesDecember 31, 2009:U.S.
      Government sponsoredentities
                                    
                                    $
                                    5,093
                                    
                                    
                                    $
                                    74
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    5,093
                                    
                                    
                                    $
                                    74Mortgage-backed
      investments
                                    
                                    
                                    4,122
                                    
                                    
                                    
                                    71
                                    
                                    
                                    
                                    76
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    4,198
                                    
                                    
                                    
                                    72Obligations
      of states and political
      subdivisions
                                    
                                    
                                    2,423
                                    
                                    
                                    
                                    40
                                    
                                    
                                    
                                    3,087
                                    
                                    
                                    
                                    60
                                    
                                    
                                    
                                    5,510
                                    
                                    
                                    
                                    100Collateralized
      debt obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,080
                                    
                                    
                                    
                                    3,091
                                    
                                    
                                    
                                    1,080
                                    
                                    
                                    
                                    3,091Other
      debt securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Equity
      securities
                                    
                                    
                                    350
                                    
                                    
                                    
                                    8
                                    
                                    
                                    
                                    84
                                    
                                    
                                    
                                    32
                                    
                                    
                                    
                                    434
                                    
                                    
                                    
                                    40$
                                    11,988
                                    
                                    
                                    $
                                    193
                                    
                                    
                                    $
                                    4,327
                                    
                                    
                                    $
                                    3,184
                                    
                                    
                                    $
                                    16,315
                                    
                                    
                                    $
                                    3,377December
      31, 2008:U.S.
      Government sponsoredentities
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Mortgage-backed
      investments
                                    
                                    
                                    14,847
                                    
                                    
                                    
                                    89
                                    
                                    
                                    
                                    1,802
                                    
                                    
                                    
                                    9
                                    
                                    
                                    
                                    16,649
                                    
                                    
                                    
                                    98Obligations
      of states andpolitical
      subdivisions
                                    
                                    
                                    26,067
                                    
                                    
                                    
                                    249
                                    
                                    
                                    
                                    2,275
                                    
                                    
                                    
                                    120
                                    
                                    
                                    
                                    28,342
                                    
                                    
                                    
                                    369Collateralized
      debt obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,969
                                    
                                    
                                    
                                    1,085
                                    
                                    
                                    
                                    3,969
                                    
                                    
                                    
                                    1,085Other
      debt securities
                                    
                                    
                                    3,024
                                    
                                    
                                    
                                    131
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,024
                                    
                                    
                                    
                                    131Equity
      securities
                                    
                                    
                                    517
                                    
                                    
                                    
                                    10
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    517
                                    
                                    
                                    
                                    10$
                                    44,455
                                    
                                    
                                    $
                                    479
                                    
                                    
                                    $
                                    8,046
                                    
                                    
                                    $
                                    1,214
                                    
                                    
                                    $
                                    52,501
                                    
                                    
                                    $
                                    1,693


70





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
3:  (Continued)





Management
believes that the impairments reflected as unrealized losses above are temporary
and will be recovered over the investments’ holding periods. At December 31,
2009 there were 3 U.S. government sponsored entity securities with unrealized
losses under 12 months in duration. There were 5 mortgage-backed securities with
unrealized losses under 12 months and 3 with unrealized losses of 12 months or
longer. There were 13 municipal securities with unrealized losses under 12
months and 23 with unrealized losses of 12 months or longer. The unrealized
losses associated with U.S. government sponsored entity, mortgage-backed and
municipal securities are primarily driven by changes in market rates and
liquidity and not due to the credit quality of the securities. Management does
not intend to sell any investment securities that have unrealized losses before
the time that those losses could be recovered. Management has evaluated the
investment securities that have unrealized losses within the framework of the
Company’s liquidity and capital needs as well as its ability to hold those
securities over an extended recovery period. Management’s evaluation involved
(1) assessing whether significant future cash outflows would occur that would
require the liquidation of securities and (2) determining if the balance sheet
would need to be managed or reduced in a way that would require the liquidation
of securities to meet regulatory capital ratio requirements. This analysis was
performed to determine if it was more likely than not that the investments would
have to be sold before their anticipated recoveries. Management determined that
it was not more likely than not that the investments would have to be disposed
of prior to their anticipated recoveries. In estimating whether there are
other-than-temporary impairment losses on debt securities management considers
(1) the length of time and extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, (3)
historical cash flows and economic factors that could detrimentally affect those
cash flows and (4) changes in credit ratings of the issuers.





There are
five collateralized debt obligations that represent the majority of unrealized
losses in the investment portfolio. These obligations are secured by commercial
bank trust preferred securities. The impairments have arisen due to a virtual
trading halt related to the liquidity crisis in corporate debt, and the effects
of the sub-prime mortgage crisis and the resulting economic deterioration and
ongoing recession on the financial stability of financial institution issuers of
the trust preferred collateral. In December 2008, these CDOs were downgraded to
below investment grade by Moody’s. During 2008 and 2009 several banks that had
issued trust preferred securities that were held as collateral in some of the
CDOs were closed by federal regulators. These defaults and the credit
downgrades, accompanied by interest deferrals by several other bank issuers,
resulted in reductions in fair value estimates as credit assumptions had to be
revised. Two of the beneficial interests had deferred interest payments and were
placed in nonaccrual status during the second quarter of 2009 resulting in a
reversal of $84 thousand of interest income. A third beneficial interest
deferred an interest payment in October 2009 which resulted in its being placed
in nonaccrual status with a resulting $25 thousand reversal of interest income
in the fourth quarter. Management evaluated these instruments for impairment as
of each quarter end during 2009 within the accounting guidelines for determining
impairments for beneficial interests using the discounted cash flow approach
prescribed, which required Management to make assumptions concerning the
estimates of the ultimate collectability of the contractual cash flows of the
beneficial interests owned. These estimates depend on the expected cash flows
that the beneficial interest issuer will receive on its investments in the trust
preferred securities of the commercial bank investees. The ability of the banks
that issued trust preferred securities to the beneficial interest issuer to pay
their obligations was determined based on an analysis of the financial condition
of the banks. This analysis resulted in an estimate of the timing and amount of
cash flows derived from a determination of how many would default on their
obligations and how many would eventually pay off their obligations and the
timing of those events. Those estimated cash flows would first pay off more
senior beneficial interests, with the remaining amounts flowing through to the
interests owned by the Company. Based on this type of analysis for each
beneficial interest issuer, the cash flows of each of the five beneficial
interests owned by the Company were projected and discounted to their present
values using their original yields and compared to the amortized cost book
values of the interests. This analysis resulted in a determination that
other-than-temporary impairment (OTTI) conditions existed for one of the
securities at June 30, 2009, two of the securities at September 30, 2009 and
three of the securities at December 31, 2009. At June 30, 2009 the
credit-related portion of the impairment of $175 thousand was charged against
current earnings with the remaining unrealized loss of $218 thousand being
charged to other comprehensive income. At September 30, 2009 the credit-related
portions of the impairments of $237 thousand were charged against earnings with
the remaining unrealized loss of $994 thousand being charged to other
comprehensive income. At December 31, 2009 the credit-related portions of the
impairments of $417 thousand were charged against earnings with the remaining
unrealized loss of $1.486 million being charged to other comprehensive income.
The unrealized losses by individual security in the CDO portfolio as of December
31, 2009 ranged from 70% of amortized cost to 80% of amortized
cost.





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)
                
                Twelve MonthsEnded December 312009Balance
      as of April 1, effective date
                
                $
                -OTTI
      credit losses on securities not previously impaired
                
                
                829Balance
      as of December 31
                
                $
                829





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.


71





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
3:  (Continued)





The
amortized cost and fair values of debt securities available for sale at December
31, 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
                  
                  $
                  27,507
                  
                  
                  $
                  27,602After
      one through five years
                  
                  
                  64,177
                  
                  
                  
                  65,454After
      five through ten years
                  
                  
                  20,240
                  
                  
                  
                  20,873After
      ten years
                  
                  
                  5,034
                  
                  
                  
                  1,901116,958
                  
                  
                  
                  115,830Mortgage-backed
      investments
                  
                  
                  162,647
                  
                  
                  
                  167,875$
                  279,605
                  
                  
                  $
                  283,705





The
following is a summary of the amortized cost and fair value of securities
available for sale which were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.





2009
                
                
                2008Amortized
                
                
                Fair
                
                
                Amortized
                
                
                Fair(Dollars in thousands)
                
                Cost
                
                
                Value
                
                
                Cost
                
                
                ValuePledged
      to secure public and tax deposits
                
                $
                212,088
                
                
                $
                215,830
                
                
                $
                168,698
                
                
                $
                171,506Pledged
      for Trust account deposits
                
                
                4,208
                
                
                
                4,324
                
                
                
                6,948
                
                
                
                6,837Pledged
      for FHLB borrowings
                
                
                1,094
                
                
                
                1,141
                
                
                
                8,756
                
                
                
                8,894Pledged
      for non-public repurchase agreements
                
                
                23,415
                
                
                
                24,177
                
                
                
                21,377
                
                
                
                21,499Pledged
      for Fed funds purchased lines of credit
                
                
                14,288
                
                
                
                14,378
                
                
                
                -
                
                
                
                -Pledged
      for letter of credit obtained
                
                
                3,701
                
                
                
                3,744
                
                
                
                -
                
                
                
                -Pledged
      to an insurance commissioner
                
                
                544
                
                
                
                591
                
                
                
                541
                
                
                
                574Total
      securities pledged
                
                $
                259,338
                
                
                $
                264,185
                
                
                $
                206,320
                
                
                $
                209,310





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





(Dollars in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Proceeds
      from sales
                    
                    $
                    17,240
                    
                    
                    $
                    6,878
                    
                    
                    $
                    6,574Gross
      realized gains
                    
                    
                    467
                    
                    
                    
                    32
                    
                    
                    
                    2Gross
      realized losses
                    
                    
                    (11
                    )
                    
                    
                    (26
                    )
                    
                    
                    (39
                    )Net
      gains (losses) from sales
                    
                    $
                    456
                    
                    
                    $
                    6
                    
                    
                    $
                    (37
                    )Gross
      recognized losses related to the credit component ofother-than-temporary impairments
                    
                    $
                    829
                    
                    
                    $
                    -
                    
                    
                    $
                    -


72





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





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 in 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)
                
                December 31, 2009
                
                
                December 31, 2008Notional
                
                
                Positive
                
                
                Negative
                
                
                Notional
                
                
                Positive
                
                
                NegativeInstrument
                
                Amount
                
                
                Fair Value
                
                
                Fair Value
                
                
                Amount
                
                
                Fair Value
                
                
                Fair ValueForward
      sale contracts
                
                $
                3,895
                
                
                $
                77
                
                
                $
                -
                
                
                $
                5,568
                
                
                $
                10
                
                
                $
                13Written
      interest rate options (locks)
                
                
                7,108
                
                
                
                8
                
                
                
                1
                
                
                
                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)
                
                Year Ended December 312009
                
                
                2008Forward
      sale contracts:Recorded
      in mortgage banking income
                
                $
                80
                
                
                $
                14Written
      interest rate options (locks):Recorded
      in mortgage banking income
                
                
                17
                
                
                
                72





Note 4:  Loans and
Allowance for Loan Losses





The
Bank's loan portfolio includes commercial, consumer, agricultural and
residential loans originated primarily in its markets in central and north
Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The
following is a summary of the Bank's loans held for investment, net of unearned
income of $1.698 million and $1.926 million at December 31, 2009, and
2008:





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008Real
      estate loans:Residential
                  
                  $
                  239,921
                  
                  
                  $
                  255,488Multifamily
                  
                  
                  41,482
                  
                  
                  
                  37,669Construction
      and land development
                  
                  
                  123,254
                  
                  
                  
                  255,655Farmland
                  
                  
                  38,508
                  
                  
                  
                  45,489Nonfarm
      nonresidential real estate
                  
                  
                  440,560
                  
                  
                  
                  406,886Commercial,
      financial and agricultural
                  
                  
                  120,415
                  
                  
                  
                  127,704Consumer
                  
                  
                  44,586
                  
                  
                  
                  37,908Other
                  
                  
                  9,614
                  
                  
                  
                  9,796$
                  1,058,340
                  
                  
                  $
                  1,176,595


73





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
4:  (Continued)





The Bank
uses loans as collateral for borrowings at the Federal Reserve Bank and a
Federal Home Loan Bank. Approximately $22.689 million of commercial and consumer
loans were pledged to a line of credit with the Federal Reserve Bank at December
31, 2009. Approximately $280.398 million of individual real estate-secured loans
were pledged to the Federal Home Loan Bank at December 31, 2009. Approximately
$674.414 million of real estate loans were pledged under a blanket lien as
collateral for FHLB borrowings at December 31, 2008.





The Bank
has made, and expects in the future to continue to make, in the ordinary course
of business, loans to directors and executive officers of the Company and the
Bank and to affiliates of these directors and officers.  In the
opinion of management, these transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and did not involve more than
normal risk of collectability at the time of the transaction.  A
summary of such outstanding loans follows:





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008Loans
      outstanding at January 1
                  
                  $
                  9,367
                  
                  
                  $
                  14,530New
      loans and advances
                  
                  
                  23,235
                  
                  
                  
                  42,683Repayments
                  
                  
                  (27,583
                  )
                  
                  
                  (47,846
                  )Retirements
                  
                  
                  (1
                  )
                  
                  
                  -Loans
      outstanding at December 31
                  
                  $
                  5,018
                  
                  
                  $
                  9,367





The
following is a summary of nonperforming assets at December 31, 2009, and
2008:





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008Nonaccrual
      loans
                  
                  $
                  44,549
                  
                  
                  $
                  20,564Other
      real estate owned
                  
                  
                  23,578
                  
                  
                  
                  11,061Total
      nonperforming credit-related assets
                  
                  $
                  68,127
                  
                  
                  $
                  31,625Accruing
      loans past due 90 days or more
                  
                  $
                  2,479
                  
                  
                  $
                  5,686Loans
      restructured and in compliance with modified terms
                  
                  $
                  4,620
                  
                  
                  $
                  3,664


74





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
4:  (Continued)





Loans are
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due in
accordance with the original contractual terms of the loan agreement, including
scheduled principal and interest payments. If a loan is impaired, a specific
valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s
existing rate or at the fair value of the collateral if repayment is expected
solely from the collateral. Interest payments on impaired loans are typically
applied to principal unless collectability of the principal amount is reasonably
assured, in which case interest is recognized on a cash basis. Impaired loans,
or portions thereof, are charged off when deemed uncollectible. Restructured
loans are considered to be impaired loans. A troubled debt restructuring occurs
when a creditor for economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it would not otherwise
consider. That concession either stems from an agreement between the creditor
and the debtor or is imposed by law or a court. The following table presents
information about the Company’s impaired loans as of and for the years ended
December 31, 2009, and 2008:





(Dollars in thousands)
                
                2009
                
                
                2008Restructured
      loans with an allowance
                
                $
                3,783
                
                
                $
                3,633Other
      impaired loans with an allowance
                
                
                40,897
                
                
                
                56,626Restructured
      loans without an allowance
                
                
                837
                
                
                
                31Other
      impaired loans without an allowance
                
                
                94,710
                
                
                
                38,144Total
      impaired loans
                
                $
                140,227
                
                
                $
                98,434Allowance
      for restructured loans
                
                $
                1,974
                
                
                $
                800Allowance
      for other impaired loans
                
                $
                11,419
                
                
                $
                12,482





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





The
following table presents information related to income recognized on impaired
loans for the years ended December 31, 2009, 2008 and 2007.





(Dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007Average
      balance of impaired loans
                
                $
                148,762
                
                
                $
                91,337
                
                
                $
                8,605Interest
      income recognized on impaired loans
                
                
                6,285
                
                
                
                4,941
                
                
                
                660





Transactions
in the allowance for loan losses are summarized as follows:





(Dollars in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Balance
      at January 1
                    
                    $
                    24,918
                    
                    
                    $
                    14,217
                    
                    
                    $
                    14,950Loans
      charged off
                    
                    
                    (48,051
                    )
                    
                    
                    (9,706
                    )
                    
                    
                    (4,744
                    )Charge
      offs resulting from write-downs of loans transferredto held for
      sale status
                    
                    
                    (3,189
                    )
                    
                    
                    -
                    
                    
                    
                    -Recoveries
                    
                    
                    735
                    
                    
                    
                    673
                    
                    
                    
                    1,491Net
      charge-offs
                    
                    
                    (50,505
                    )
                    
                    
                    (9,033
                    )
                    
                    
                    (3,253
                    )Provision
      for loan losses
                    
                    
                    49,601
                    
                    
                    
                    19,734
                    
                    
                    
                    2,520Balance
      at December 31
                    
                    $
                    24,014
                    
                    
                    $
                    24,918
                    
                    
                    $
                    14,217


75





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 5:  Bank
Premises and Equipment





The
following is a summary of bank premises and equipment at December 31, 2009, and
2008:





(Dollars in thousands)
                  
                  2009
                  
                  
                  2008Land
                  
                  $
                  14,278
                  
                  
                  $
                  14,278Buildings
                  
                  
                  37,304
                  
                  
                  
                  36,951Furniture,
      fixtures and equipment
                  
                  
                  20,804
                  
                  
                  
                  23,759Leasehold
      improvements
                  
                  
                  890
                  
                  
                  
                  751Construction
      in progress
                  
                  
                  380
                  
                  
                  
                  36873,656
                  
                  
                  
                  76,107Less
      accumulated depreciation and amortization
                  
                  
                  30,737
                  
                  
                  
                  31,465$
                  42,919
                  
                  
                  $
                  44,642





Amounts
charged to operating expenses for depreciation and amortization of bank premises
and equipment were $2.841 million in 2009, $2.888 million in 2008, and $2.724
million in 2007.





Construction
in progress includes a balance of $84 thousand for renovation of the Oxford,
Mississippi main branch. This project, which was originally scheduled for 2009,
is expected to be completed during 2010 with an estimated total cost of $1.3
million.





Rent
expense applicable to operating leases was as follows for the years ended
December 31:





(Dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007Buildings
      and office space
                
                $
                844
                
                
                $
                815
                
                
                $
                650Computer
      equipment
                
                
                399
                
                
                
                713
                
                
                
                777Other
      equipment and autos
                
                
                276
                
                
                
                317
                
                
                
                3241,519
                
                
                
                1,845
                
                
                
                1,751Rental
      income
                
                
                (47
                )
                
                
                (56
                )
                
                
                (42
                )Net
      rent expense
                
                $
                1,472
                
                
                $
                1,789
                
                
                $
                1,709





The
Company is obligated under a number of noncancelable operating leases for
premises and equipment. Minimum future lease payments for noncancelable
operating leases at December 31, 2009, are as follows:





(Dollars in thousands)2010
                    
                    $
                    7922011
                    
                    
                    4462012
                    
                    
                    3892013
                    
                    
                    3352014
                    
                    
                    286After
      2014
                    
                    
                    683Total
      minimum lease payments
                    
                    $
                    2,931





Note 6:  Goodwill
and Intangible Assets





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


76




FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
6:  (Continued)





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





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





The
following is a summary of goodwill and intangible assets at December 31,
2009:





CustomerCore
                          
                          
                          Renewal
                          
                          
                          Noncompete
                          
                          
                          Banking(Dollars
      in thousands)
                          
                          Goodwill
                          
                          
                          Deposits
                          
                          
                          Lists
                          
                          
                          Agreements
                          
                          
                          CharterBalance
      at January 1, 2008
                          
                          $
                          32,572
                          
                          
                          $
                          6,292
                          
                          
                          $
                          228
                          
                          
                          $
                          67
                          
                          
                          $
                          1,025Amortization
      expense
                          
                          
                          -
                          
                          
                          
                          (427
                          )
                          
                          
                          (30
                          )
                          
                          
                          (28
                          )
                          
                          
                          -Balance
      at December 31, 2008
                          
                          $
                          32,572
                          
                          
                          $
                          5,865
                          
                          
                          $
                          198
                          
                          
                          $
                          39
                          
                          
                          $
                          1,025Amortization
      expense
                          
                          
                          -
                          
                          
                          
                          (426
                          )
                          
                          
                          (7
                          )
                          
                          
                          (7
                          )
                          
                          
                          -Impairment
      charge
                          
                          
                          (32,572
                          )
                          
                          
                          -
                          
                          
                          
                          (191
                          )
                          
                          
                          (32
                          )
                          
                          
                          (1,025
                          )Balance
      at December 31, 2009
                          
                          $
                          -
                          
                          
                          $
                          5,439
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Estimated amortization
    expense2010
                          
                          
                          
                          
                          
                          $
                          4272011
                          
                          
                          
                          
                          
                          
                          4272012
                          
                          
                          
                          
                          
                          
                          4272013
                          
                          
                          
                          
                          
                          
                          4272014
                          
                          
                          
                          
                          
                          
                          427





The
following tables summarize the gross carrying amounts and accumulated
amortization balances of amortizing intangible assets as of December 31, 2009,
and 2008.





Gross
                  
                  
                  
                  
                  
                  NetCarrying
                  
                  
                  Accumulated
                  
                  
                  Carrying(Dollars in
      thousands)
                  
                  Amount
                  
                  
                  Amortization
                  
                  
                  AmountDecember
      31, 2009:Customer
      renewal lists
                  
                  $
                  513
                  
                  
                  $
                  513
                  
                  
                  $
                  -Noncompete
      agreements
                  
                  
                  413
                  
                  
                  
                  413
                  
                  
                  
                  -Core
      deposits
                  
                  
                  7,060
                  
                  
                  
                  1,621
                  
                  
                  
                  5,439$
                  7,986
                  
                  
                  $
                  2,547
                  
                  
                  $
                  5,439





December
      31, 2008:Customer
      renewal lists
                  
                  $
                  513
                  
                  
                  $
                  315
                  
                  
                  $
                  198Noncompete
      agreements
                  
                  
                  413
                  
                  
                  
                  374
                  
                  
                  
                  39Core
      deposits
                  
                  
                  7,060
                  
                  
                  
                  1,195
                  
                  
                  
                  5,865$
                  7,986
                  
                  
                  $
                  1,884
                  
                  
                  $
                  6,102





Intangible
assets with a determinable useful life are amortized over their respective
useful lives. Core deposit intangibles have lives of 16 to 20 years with a
remaining average life of 12.9 years at December 31, 2009.





Amortization
expense for intangible assets having determinable useful lives amounted to $440
thousand in 2009, $485 thousand in 2008, and $547 thousand in 2007. Impairment
charges for intangible assets having determinable useful lives amounted to $223
thousand in 2009.


77





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 7:  Other
Assets





The
following is a summary of other assets at December 31, 2009, and
2008:





(Dollarsin
      thousands)
                  
                  2009
                  
                  
                  2008Cash
      surrender value of bank owned life insurance
                  
                  $
                  21,082
                  
                  
                  $
                  20,522Federal
      Home Loan Bank stock
                  
                  
                  7,326
                  
                  
                  
                  7,532Income
      taxes receivable
                  
                  
                  8,498
                  
                  
                  
                  2,401Deferred
      income tax
                  
                  
                  15,219
                  
                  
                  
                  5,023Investment
      in First M&F Statutory Trust I
                  
                  
                  928
                  
                  
                  
                  928Other
                  
                  
                  3,983
                  
                  
                  
                  5,061$
                  57,036
                  
                  
                  $
                  41,467





As a
condition to borrowing funds from the Federal Home Loan Bank (FHLB) of Dallas,
the Bank is required to purchase stock in the FHLB. No ready market exists for
the stock, and it has no quoted market value. The investment in FHLB stock can
only be redeemed by the FHLB at face value.





Note
8:  Deposits





The
following is a summary of deposits at December 31, 2009, and 2008:





(Dollars in
      thousands)
                  
                  2009
                  
                  
                  2008Noninterest-bearing
                  
                  $
                  228,579
                  
                  
                  $
                  178,689Interest-bearing:NOW
      and money market deposits
                  
                  
                  471,115
                  
                  
                  
                  399,698Savings
      deposits
                  
                  
                  112,764
                  
                  
                  
                  114,281Core
      certificates of deposit of $100 thousand or more
                  
                  
                  266,131
                  
                  
                  
                  276,763Other
      core certificates of deposit
                  
                  
                  290,602
                  
                  
                  
                  272,461Brokered
      certificates of deposit of $100 thousand or more
                  
                  
                  11,788
                  
                  
                  
                  -Other
      brokered certificates of deposit
                  
                  
                  7,284
                  
                  
                  
                  19,495Total
      interest-bearing
                  
                  
                  1,159,684
                  
                  
                  
                  1,082,698Total
      deposits
                  
                  $
                  1,388,263
                  
                  
                  $
                  1,261,387





Interest
expense on certificates of deposit of $100 thousand or more amounted to $7.900
million in 2009, $11.168 million in 2008 and $13.210 million in
2007.





The
amount of overdrawn demand and savings deposits that were reclassified as loans
held for investment were $608 thousand at December 31, 2009, and $962 thousand
at December 31, 2008.





At
December 31, 2009, the scheduled maturities of certificates of deposit are as
follows:





(Dollars in
      thousands)2010
                  
                  $
                  423,9982011
                  
                  
                  106,8352012
                  
                  
                  28,7162013
                  
                  
                  7,1372014
                  
                  
                  9,119After
      2014
                  
                  
                  -$
                  575,805





The
amount of deposits of directors and executive officers and their related
interests were $16.172 million at December 31, 2009, and $13.820 million at
December 31, 2008.


78





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
9:  Short-Term Borrowings





The
following is a summary of information related to short-term
borrowings:





(Dollars in
      thousands)
                        
                        
                        
                        
                        WeightedBalance
      Outstanding
                        
                        
                        Average
      RateMaximum
                        
                        
                        Average
                        
                        
                        At
                        
                        
                        During
                        
                        
                        AtMonth
      End
                        
                        
                        Daily
                        
                        
                        Year
      End
                        
                        
                        Year
                        
                        
                        Year
      End2009:Federal
      funds purchased
                        
                        $
                        -
                        
                        
                        $
                        117
                        
                        
                        $
                        -
                        
                        
                        
                        0.80
                        %
                        
                        
                        -
                        %Securities
      sold underagreements
      to repurchase
                        
                        
                        12,985
                        
                        
                        
                        10,331
                        
                        
                        
                        8,642
                        
                        
                        
                        0.93
                        %
                        
                        
                        0.61
                        %$
                        12,985
                        
                        
                        $
                        10,448
                        
                        
                        $
                        8,6422008:Federal
      funds purchased
                        
                        $
                        325
                        
                        
                        $
                        984
                        
                        
                        $
                        -
                        
                        
                        
                        2.62
                        %
                        
                        
                        -
                        %Securities
      sold underagreements
      to repurchase
                        
                        
                        20,879
                        
                        
                        
                        12,876
                        
                        
                        
                        9,728
                        
                        
                        
                        2.34
                        %
                        
                        
                        1.76
                        %$
                        21,204
                        
                        
                        $
                        13,860
                        
                        
                        $
                        9,7282007:Federal
      funds purchased
                        
                        $
                        20,000
                        
                        
                        $
                        6,291
                        
                        
                        $
                        -
                        
                        
                        
                        5.34
                        %
                        
                        
                        -
                        %Securities
      sold underagreements
      to repurchase
                        
                        
                        9,676
                        
                        
                        
                        6,154
                        
                        
                        
                        9,676
                        
                        
                        
                        4.44
                        %
                        
                        
                        3.87
                        %$
                        29,676
                        
                        
                        $
                        12,445
                        
                        
                        $
                        9,676





Federal
funds purchased represent primarily overnight borrowings through relationships
with correspondent banks. Federal funds purchased may be obtained through
secured or unsecured lines. The Company has pledged $14.378 million in
investment securities to secure certain Federal funds lines. Securities sold
under agreements to repurchase generally have maturities of less than 30 days
and are collateralized by U. S. Treasury securities and securities of U. S.
Government agencies and sponsored entities. The Company has pledged $24.177
million in investment securities to secure repurchase agreements.





Note 10:  Other
Borrowings





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





(Dollars in
      thousands)
                            
                            2009
                            
                            
                            2008Company’s
      line of credit in the amount of $5,000,000, maturing inFebruary
      2010; secured by approximately 29% of the Bank’s commonstock;
      interest payable quarterly at the prime rate with a floor of
      3.50%
                            
                            $
                            1,916
                            
                            
                            $
                            2,416Bank’s
      advances from Federal Home Loan Banks
                            
                            
                            120,594
                            
                            
                            
                            149,131$
                            122,510
                            
                            
                            $
                            151,547Company’s
      junior subordinated debentures, interest payable quarterly at
      6.44%through
      March 2011, and payable quarterly at 90-day LIBOR plus 1.33%
      throughMarch
      2036; redeemable at par after March 2011
                            
                            $
                            30,928
                            
                            
                            $
                            30,928





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





The Bank
has advances and letters of credit from the Federal Home Loan Bank of Dallas
(FHLB) collateralized by real estate-secured loans. The Bank had a line of
credit of approximately $122.301 million at December 31, 2009 with an available
credit balance of approximately $1.607 million.





The Bank
has a line of credit with the Federal Reserve Discount Window collateralized by
commercial and consumer loans. The bank had a line of credit of approximately
$14.747 million at December 31, 2009, all of which was
available.


79





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
10:  (Continued)





The
Company may elect to defer up to 20 consecutive quarterly payments of interest
on the junior subordinated debentures. During an extension period the Company
may not declare or pay dividends on its common stock, repurchase common stock or
repay any debt that has equal rank or is subordinate to the debentures. The
Company is prohibited from issuing any class of common or preferred stock that
is senior to the junior subordinated debentures during the term of the
debentures.





Under the
terms of an informal Memorandum of Understanding with the Federal Reserve Bank
of St. Louis, the Company must obtain prior approval by the Federal Reserve of
the payment of interest on outstanding trust preferred securities and of the
incurrence of additional debt by the holding company.





The
following is a summary of FHLB advances at December 31, 2009, and
2008:





(Dollars in
      thousands)
                  
                  2009
                  
                  
                  2008Single
      payment advances maturing within 12 months of year end:Balance
                  
                  $
                  67,500
                  
                  
                  $
                  40,000Range
      of rates
                  
                  
                  2.72%-6.50
                  %
                  
                  
                  3.69%-5.38
                  %Single
      payment advances maturing after 12 months of year end:Balance
                  
                  $
                  -
                  
                  
                  $
                  67,500Range
      of rates
                  
                  
                  -
                  
                  
                  
                  2.72%-6.50
                  %Range
      of maturities
                  
                  
                  -
                  
                  
                  2010Amortizing
      advances:Balance
                  
                  $
                  53,094
                  
                  
                  $
                  41,631Monthly
      payment amount
                  
                  
                  565
                  
                  
                  
                  655Range
      of rates
                  
                  
                  3.17%-8.48
                  %
                  
                  
                  3.05%-8.48
                  %Range
      of maturities
                  
                  
                  2010-2020
                  
                  
                  
                  2009-2020





Scheduled
principal payments on FHLB advances at December 31, 2009, are as
follows:





(Dollars in
      thousands)2010
                  
                  $
                  74,2812011
                  
                  
                  6,6042012
                  
                  
                  6,4942013
                  
                  
                  19,4882014
                  
                  
                  2,260After
      2014
                  
                  
                  11,467$
                  120,594





Note 11:  Variable
Interest Entity





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. The subordinated debentures are redeemable at par at any time
commencing in March 2011. The subordinated debentures are the only asset of the
Trust. The Trust issued $30.000 million in capital securities through a
placement and issued $928 thousand of common securities to the
Company.





First
M&F Statutory Trust I is a variable interest entity. A determination has
been made that the Company, since its equity interest is not at risk, is not the
primary beneficiary and therefore, the Trust is not consolidated with the
Company’s financial statements.


80





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
12:  Commitments and Contingencies





Legal
Proceedings





The
Company, the Bank and the Bank’s subsidiaries are parties to lawsuits and other
claims that arise in the ordinary course of business. Some of the lawsuits
allege substantial claims for damages. The cases are being vigorously contested.
In the regular course of business, management evaluates the estimated losses or
costs related to litigation, and provision is made for anticipated losses
whenever management believes that such losses are probable and can be reasonably
estimated. At the present time, based upon present information, management
cannot predict what effect, if any, the final resolution of pending legal
proceedings will have on the Company’s consolidated financial position or
results of operations.





Credit Related Financial
Instruments





The
Company is a party to credit related financial instruments with off balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit.  These
instruments involve, to varying degrees, elements of credit and interest rate
risk.





Commitments
to extend credit are agreements to lend money to customers pursuant to certain
specified conditions and generally have fixed expiration dates or other
termination clauses. Since many of these commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. When making these commitments, the Company
applies the same credit policies and standards as it does in the normal lending
process. Collateral is obtained based upon the Company's assessment of a
customer's credit worthiness.





Standby
and commercial letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. When
issuing letters of credit, the Company applies the same credit policies and
standards as it does in the normal lending process. Collateral is obtained based
upon the Company's assessment of a customer's credit worthiness. A liability of
$31 thousand is recognized at December 31, 2009, and a liability of $28 thousand
is recognized at December 31, 2008, for the Company’s obligation to stand ready
to perform related to standby letters of credit.





The
maximum credit exposure in the event of nonperformance for loan commitments and
letters of credit is represented by the contract amount of the instruments. A
summary of these instruments at December 31, 2009, and 2008
follows:





(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Commitments
      to extend credit
                  
                  $
                  145,335
                  
                  
                  $
                  172,209Standby
      letters of credit
                  
                  
                  3,336
                  
                  
                  
                  4,770





At
December 31, 2009, there were $100 thousand and 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 generally uses these letters as security for
public funds deposits and is obligated to the Federal Home Loan Bank if the
letters of credit must be drawn upon. The letters of credit expire in
2010.





The
Company makes commitments to originate mortgage loans that will be held for
sale. The total commitments to originate mortgages to be held for sale were
$7.108 million at December 31, 2009, and $8.379 million at December 31, 2008.
These commitments are accounted for as derivatives and marked to fair value
through mortgage banking income. At December 31, 2009, mortgage
origination-related derivatives with positive fair values of $8 thousand were
included in other assets and derivatives with negative fair values of $1
thousand were included in other liabilities. At December 31, 2008, mortgage
origination-related derivatives with positive fair values of $35 thousand were
included in other assets and derivatives with negative fair values of $14
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 December 31, 2009 and 2008, the Company had $3.895 million
and $5.568 million in locked forward sales agreements in place. At December 31,
2009, forward sale-related derivatives with positive fair values of $77 thousand
were included in other assets and no derivatives with negative fair values were
included in other liabilities. At December 31, 2008, forward sale-related
derivatives with positive fair values of $10 thousand were included in other
assets and derivatives with negative fair values of $13 thousand were included
in other liabilities.





Mortgages
that are sold generally have recourse until the first payment is made. The
Company may also be required to repurchase mortgages that do not conform to FNMA
or FHA underwriting standards or that contain critical documentation errors or
fraud. The Company has not sustained any recourse-related losses in its mortgage
program and the repurchase of mortgages has been an extremely rare event.
Mortgages sold that had not reached the first payment date were $8.093 million
at December 31, 2009, and $2.843 million at December 31, 2008. The Company did
not have a recourse liability recorded at December 31, 2009, or
2008.





The
Company is a guarantor of the First M&F Statutory Trust I to the extent that
if at any time the Trust is required to pay taxes, duties, assessments or
governmental charges of any kind, then the Company is required to pay to the
Trust additional sums to cover the required payments.





The
Company irrevocably and unconditionally guarantees, with respect to the Capital
Securities of the First M&F Statutory Trust I, and to the extent not paid by
the Trust, accrued and unpaid distributions on the Capital Securities and the
redemption price payable to the holders of the Capital
Securities.


81





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
13:  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
                    
                    
                    NetDecember
      31, 2009:Net
      unrealized gain on securities available for sale
                    
                    $
                    6,778
                    
                    
                    $
                    2,529
                    
                    
                    $
                    4,249Net
      unrealized loss on other-than-temporarily impairedsecurities
      available for sale
                    
                    
                    (2,698
                    )
                    
                    
                    (1,007
                    )
                    
                    
                    (1,691
                    )Net
      unamortized pension costs
                    
                    
                    (3,476
                    )
                    
                    
                    (1,297
                    )
                    
                    
                    (2,179
                    )$
                    604
                    
                    
                    $
                    225
                    
                    
                    $
                    379December
      31, 2008:Net
      unrealized gain on securities available for sale
                    
                    $
                    3,263
                    
                    
                    $
                    1,217
                    
                    
                    $
                    2,046Net
      unamortized pension costs
                    
                    
                    (4,423
                    )
                    
                    
                    (1,650
                    )
                    
                    
                    (2,773
                    )$
                    (1,160
                    )
                    
                    $
                    (433
                    )
                    
                    $
                    (727
                    )December
      31, 2007:Net
      unrealized gain on securities available for sale
                    
                    $
                    563
                    
                    
                    $
                    210
                    
                    
                    $
                    353Minimum
      pension liability
                    
                    
                    (1,792
                    )
                    
                    
                    (668
                    )
                    
                    
                    (1,124
                    )$
                    (1,229
                    )
                    
                    $
                    (458
                    )
                    
                    $
                    (771
                    )





Note
14:  Stockholders’ Equity





Preferred
Stock





The
Company is authorized to issue 1,000,000 shares of cumulative Class A voting
preferred stock of no par value and 1,000,000 shares of cumulative Class B
non-voting preferred stock of no par value. Dividend rates, redemption terms and
conversion terms may be set by the Board of Directors.





On
February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative
Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S.
Treasury as part of its participation in the Capital Purchase Program.
Concurrent with the issuance of the preferred stock, the Company also issued a
ten-year warrant to purchase up to 513,113 shares of the Company’s common stock
at an exercise price of $8.77 per share to the U. S. Treasury. The Company
received $30.000 million from the U. S. Treasury in exchange for the preferred
stock and common stock warrant.





Cumulative
dividends on the Class B, Series A Preferred Stock will accrue on the $1,000
liquidation preference at a rate of 5% per annum for the first five years, and
at a rate of 9% per annum thereafter but will be paid only if, as, and when
declared by the Company’s Board of Directors. The Class B, Series A Preferred
Stock has no maturity date and ranks senior to the Common Stock with respect to
the payment of dividends and distributions and amounts payable upon liquidation,
dissolution and winding up of the Company. The Class B, Series A Preferred Stock
is generally non-voting.





The
Company may redeem the Class B, Series A Preferred Stock in whole or in part at
$1,000 per share at any time, subject to the consent of the Federal Reserve Bank
of St. Louis, which is the Company’s primary Federal banking regulator and the
U.S. Treasury Department.


82





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
14:  (Continued)





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%, based on observed 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 2009 was $201
thousand.





Dividend Reinvestment and
Stock Purchase Plan





The
Dividend Reinvestment and Stock Purchase Plan authorizes the sale of up to
200,000 shares of the Company’s common stock from authorized, but unissued,
shares or from shares acquired on the open market to shareholders who choose to
invest all or a portion of their cash dividends and make optional cash payments
of $50.00 to $5,000.00 per quarter. All shares for this plan have been purchased
on the open market. The price of shares purchased on the open market is the
average price paid for all shares purchased for all participants.





Common Stock Repurchase
Program





On
December 12, 2007, the Company’s Board of Directors authorized a stock
repurchase plan allowing for the purchase of up to 500,000 shares during the
period of January through December 2008.





The
timing and extent of any repurchases were subject to management’s discretion and
depended on market considerations. The Board reviewed the repurchase program at
the end of 2008 and decided not to renew the plan. The reacquired shares are
held as authorized but unissued shares to be used for general corporate
purposes.





Dividend
Restrictions





The
Company and the Bank are subject to certain restrictions related to the payment
of dividends. These restrictions are discussed in Note 20 – Regulatory
Matters.


83





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 15:  Stock
Compensation Plan





The
Company implemented a stockholder approved Stock Option Plan, effective January
1, 1999, authorizing the grant of incentive stock options (ISO's) to key
employees and nonstatutory stock options (NSO's) to members of the Board. The
stated purpose of the plan was to provide incentives to key officers and
directors by permitting them to purchase stock in the Company under the
provisions of this plan. The maximum number of shares of stock that could be
optioned or sold under the plan was 500,000 shares. Under the provisions of the
plan, the Company and the participating employees and directors executed
agreements, upon the grant of options, providing each participant with an option
to purchase stock within ten years of the date of the grant. In May 2005, the
Stock Option Plan was replaced by the shareholder approved 2005 Equity Incentive
Plan. The plan allows for share-based payments in the form of stock options,
restricted stock awards, stock appreciation rights and other stock-based awards.
The maximum number of shares that may be awarded are 700,000. However, there are
limits on certain types of awards. The maximum number of shares that may be
awarded in the form of stock options is 400,000. The maximum number of shares
that may be awarded in forms other than options and stock appreciation rights is
500,000. The maximum number of shares that may be awarded to Directors is
100,000.





The
Company uses the fair value method of accounting for stock-based compensation.
Stock options generally vest evenly over a five year period. Stock grants fully
vest on certain dates (cliff vesting), for generally one, three, five or seven
year terms. The fair values of stock options and restricted stock grants are
accrued to salary and benefits expenses over their vesting periods. The amounts
accrued are equal to the fair values less an estimate for expected forfeitures.
These accruals are subsequently adjusted for differences between estimated
forfeiture rates and the actual experienced forfeiture rates.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions in 2009, 2008
and 2007: expected dividend yields of 1.50%, 3.00% and 3.00%; expected
volatility of 23.37%, 19.47% and 19.95%; risk-free interest rates of 2.47%,
3.19% and 4.62%; and expected lives of 7 years. Expected dividends are based on
current dividend rates at the grant date. Expected volatility is estimated using
the Company’s historical price variances over the prior ten years. The expected
lives are calculated as the average of the contractual life and the vesting
period, which approximates the Company’s historical experience. The estimated
fair values of stock options at their grant date were $1.28 in 2009, $2.34 in
2008 and $3.91 in 2007. In determining the amounts of compensation expense to
record for unvested stock options the Company is using an estimated forfeiture
rate of 9.45% (1.89% annual rate) for employee grants and 5.45% (1.09% annual
rate) for Director grants based upon the history of the plan.





The
following table shows the amounts of stock-based compensation that was included
in salary and employee benefits expenses.





(Dollars in thousands, except
      share data)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Stock
      option expense recognized, gross
                  
                  $
                  16
                  
                  
                  $
                  19
                  
                  
                  $
                  20Adjustment
      for actual vs expected forfeitures
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  -Stock
      option expense recognized, net
                  
                  
                  16
                  
                  
                  
                  9
                  
                  
                  
                  20Restricted
      stock award expenses recognized, gross
                  
                  
                  257
                  
                  
                  
                  321
                  
                  
                  
                  332Adjustment
      for actual vs expected forfeitures
                  
                  
                  (200
                  )
                  
                  
                  (121
                  )
                  
                  
                  (33
                  )Restricted
      stock award expenses recognized, net
                  
                  
                  57
                  
                  
                  
                  200
                  
                  
                  
                  299Total
      stock-based compensation
                  
                  
                  73
                  
                  
                  
                  209
                  
                  
                  
                  319Income
      tax benefits
                  
                  
                  (27
                  )
                  
                  
                  (78
                  )
                  
                  
                  (119
                  )Net
      stock-based compensation recognized
                  
                  $
                  46
                  
                  
                  $
                  131
                  
                  
                  $
                  200


84





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
15:  (Continued)





The
following is a summary of stock awards activity:





2005
      Plan
                
                
                1999
      PlanRestricted
      Stock
                
                
                Stock
      Options
                
                
                Stock
      OptionsWeightedAverageShares
                
                
                
                
                
                Grant
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedAvailable
                
                
                Number
                
                
                Date
                
                
                Number
                
                
                Average
                
                
                Number
                
                
                Averagefor
                
                
                of
                
                
                Fair
                
                
                Of
                
                
                Exercise
                
                
                of
                
                
                ExerciseGrant
                
                
                Shares
                
                
                Value
                
                
                Shares
                
                
                Price
                
                
                Shares
                
                
                PriceBalance
      January 1, 2007
                
                
                579,234
                
                
                
                117,766
                
                
                $
                17.091
                
                
                
                3,000
                
                
                $
                19.055
                
                
                
                182,262
                
                
                $
                15.523Awards
      Granted
                
                
                (15,250
                )
                
                
                13,250
                
                
                
                15.480
                
                
                
                2,000
                
                
                
                19.000
                
                
                
                -
                
                
                
                -Exercises
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (19,854
                )
                
                
                15.373Vested
                
                
                -
                
                
                
                (1,500
                )
                
                
                19.590
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeitures
                
                
                6,000
                
                
                
                (6,000
                )
                
                
                17.075
                
                
                
                -
                
                
                
                -
                
                
                
                (4,400
                )
                
                
                16.858Cancelled
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (38,108
                )
                
                
                13.960December
      31, 2007
                
                
                569,984
                
                
                
                123,516
                
                
                
                16.888
                
                
                
                5,000
                
                
                
                19.033
                
                
                
                119,900
                
                
                
                15.995Awards
      Granted
                
                
                (7,000
                )
                
                
                -
                
                
                
                -
                
                
                
                7,000
                
                
                
                13.840
                
                
                
                -
                
                
                
                -Vested
                
                
                -
                
                
                
                (3,266
                )
                
                
                18.230
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeitures
                
                
                14,000
                
                
                
                (14,000
                )
                
                
                17.075
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -December
      31, 2008
                
                
                576,984
                
                
                
                106,250
                
                
                
                16.823
                
                
                
                12,000
                
                
                
                16.004
                
                
                
                119,900
                
                
                
                15.995Awards
      Granted
                
                
                (4,000
                )
                
                
                -
                
                
                
                -
                
                
                
                4,000
                
                
                
                5.140
                
                
                
                -
                
                
                
                -Vested
                
                
                -
                
                
                
                (6,000
                )
                
                
                16.855
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeitures
                
                
                23,250
                
                
                
                (23,250
                )
                
                
                16.754
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (98,300
                )
                
                
                16.195December
      31, 2009
                
                
                596,234
                
                
                
                77,000
                
                
                $
                16.841
                
                
                
                16,000
                
                
                $
                13.288
                
                
                
                21,600
                
                
                $
                15.087





The
following is a summary of stock options outstanding at December 31,
2009:





Weighted
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedAverage
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageRemaining
                      
                      
                      Exercise
                      
                      
                      
                      
                      
                      ExerciseContractual
                      
                      
                      Price-
                      
                      
                      
                      
                      
                      Price-Exercise
                      
                      
                      Options
                      
                      
                      Life
                      
                      
                      Options
                      
                      
                      Options
                      
                      
                      OptionsPrice
      Range
                      
                      
                      Outstanding
                      
                      
                      (Years)
                      
                      
                      Outstanding
                      
                      
                      Exercisable
                      
                      
                      Exercisable$
                      5.14
      - 10.00
                      
                      
                      
                      7,000
                      
                      
                      
                      5.83
                      
                      
                      $
                      7.22
                      
                      
                      
                      3,000
                      
                      
                      $
                      10.0010.01
      - 15.00
                      
                      
                      
                      13,000
                      
                      
                      
                      5.41
                      
                      
                      
                      13.09
                      
                      
                      
                      7,400
                      
                      
                      
                      12.5215.01
      - 19.06
                      
                      
                      
                      17,600
                      
                      
                      
                      5.24
                      
                      
                      
                      17.97
                      
                      
                      
                      13,160
                      
                      
                      
                      17.9137,600
                      
                      
                      
                      5.41
                      
                      
                      $
                      14.28
                      
                      
                      
                      23,560
                      
                      
                      $
                      15.21





There was
no aggregate intrinsic value of options exercisable at December 31, 2009 or
December 31, 2008. The aggregate intrinsic value of options exercisable at
December 31, 2007, was $45 thousand. The total intrinsic value of options
exercised during 2009, 2008 and 2007 was $0, $0 and $58 thousand, respectively.
At December 31, 2009, there was a total of $25 thousand in unrecognized
compensation costs, expected to be recognized over a weighted-average period of
2.0 years, related to stock options.





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


85





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
15:  (Continued)





The
Company has issued restricted stock awards to certain executives and senior
officers. The awards vest over periods of one to seven years and are forfeited
in their entirety if the officer leaves the Company before the end of the
vesting term. Additionally the restricted shares include a performance condition
that may accelerate vesting at the achievement of a diluted earnings per share
and net income target. Non-achievement of the performance condition during the
vesting period would not prevent vesting of the shares. Dividends are paid
quarterly to restricted stock grantees. At December 31, 2009, and 2008, there
were $.588 million and $.973 million in unrecognized compensation costs. The
unrecognized costs at December 31, 2009, are expected to be recognized over a
weighted-average period of 3.4 years. The Company estimates that 4.00% (.57%
annual rate) of the nonvested shares will be forfeited in determining net
compensation expenses recognized. In August 2008, 1,766 shares of restricted
stock with a fair value of $19 thousand became fully vested and outstanding, and
in December 2008, 1,500 shares of restricted stock with a fair value of $13
thousand became fully vested and outstanding. In May 2009, 6,000 shares of
restricted stock with a fair value of $26 thousand became fully vested and
outstanding.





Note 16:  Other
Expenses





Significant
components of other expenses are summarized as follows:





(Dollars in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Postage
      and shipping
                  
                  $
                  926
                  
                  
                  $
                  931
                  
                  
                  $
                  831Stationery
      and supplies
                  
                  
                  814
                  
                  
                  
                  868
                  
                  
                  
                  1,002Accounting,
      legal and professional fees
                  
                  
                  2,160
                  
                  
                  
                  1,704
                  
                  
                  
                  922Insurance
      expense
                  
                  
                  782
                  
                  
                  
                  802
                  
                  
                  
                  806Other
                  
                  
                  6,274
                  
                  
                  
                  5,575
                  
                  
                  
                  5,497$
                  10,956
                  
                  
                  $
                  9,880
                  
                  
                  $
                  9,058


86





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 17:  Income
Taxes





The
components of income tax expense (benefit) are as follows:





(Dollars
      in thousands)
                  
                  Federal
                  
                  
                  State
                  
                  
                  Total2009:Current
                  
                  $
                  (6,221
                  )
                  
                  $
                  (1,028
                  )
                  
                  $
                  (7,249
                  )Deferred
                  
                  
                  (9,341
                  )
                  
                  
                  (1,514
                  )
                  
                  
                  (10,855
                  )Total
                  
                  $
                  (15,562
                  )
                  
                  $
                  (2,542
                  )
                  
                  $
                  (18,104
                  )2008:Current
                  
                  $
                  2,225
                  
                  
                  $
                  253
                  
                  
                  $
                  2,478Current
      benefits from net operating loss carryforwards
                  
                  
                  (244
                  )
                  
                  
                  -
                  
                  
                  
                  (244
                  )Deferred
                  
                  
                  (3,178
                  )
                  
                  
                  (492
                  )
                  
                  
                  (3,670
                  )Total
                  
                  $
                  (1,197
                  )
                  
                  $
                  (239
                  )
                  
                  $
                  (1,436
                  )2007:Current
                  
                  $
                  4,631
                  
                  
                  $
                  502
                  
                  
                  $
                  5,133Current
      benefits from net operating loss carryforwards
                  
                  
                  (349
                  )
                  
                  
                  -
                  
                  
                  
                  (349
                  )Deferred
                  
                  
                  1,949
                  
                  
                  
                  243
                  
                  
                  
                  2,192Total
                  
                  $
                  6,231
                  
                  
                  $
                  745
                  
                  
                  $
                  6,976





The
differences between actual income tax expense (benefit) and expected income tax
expense (benefit) are summarized as follows:





(Dollars
      in thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007Amount
      computed using the Federal statutoryrates
      on income before taxes
                        
                        $
                        (26,489
                        )
                        
                        $
                        (303
                        )
                        
                        $
                        7,299Increase
      (decrease) resulting from:Tax
      exempt income, net ofdisallowed
      interest deduction
                        
                        
                        (770
                        )
                        
                        
                        (739
                        )
                        
                        
                        (605
                        )State
      income tax expense,net
      of Federal effect
                        
                        
                        (1,677
                        )
                        
                        
                        (157
                        )
                        
                        
                        492Life
      insurance income
                        
                        
                        (259
                        )
                        
                        
                        (209
                        )
                        
                        
                        (234
                        )Goodwill
      impairment expense
                        
                        
                        11,074
                        
                        
                        
                        -
                        
                        
                        
                        -Other,
      net
                        
                        
                        17
                        
                        
                        
                        (28
                        )
                        
                        
                        24$
                        (18,104
                        )
                        
                        $
                        (1,436
                        )
                        
                        $
                        6,976




87





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
17:  (Continued)





The
change in the net deferred taxes is a result of current period deferred tax
expense (benefit), and changes in accumulated other comprehensive income. The
components of the net deferred tax asset (liability) at December 31, 2009, and
2008 consist of the following:





(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Allowance
      for loan losses
                  
                  $
                  8,957
                  
                  
                  $
                  9,267Loan
      fees
                  
                  
                  402
                  
                  
                  
                  448Purchase
      accounting adjustments
                  
                  
                  293
                  
                  
                  
                  402Nonperforming
      assets
                  
                  
                  3,223
                  
                  
                  
                  1,128Accrued
      expenses
                  
                  
                  236
                  
                  
                  
                  236Share-based
      compensation
                  
                  
                  299
                  
                  
                  
                  312Employee
      benefit plans
                  
                  
                  150
                  
                  
                  
                  154Net
      pension liability and unamortized pension costs
                  
                  
                  197
                  
                  
                  
                  299Net
      operating loss carry forward
                  
                  
                  7,893
                  
                  
                  
                  -Other
                  
                  
                  87
                  
                  
                  
                  94Total
      deferred tax assets
                  
                  
                  21,737
                  
                  
                  
                  12,340Fixed
      assets and depreciation
                  
                  
                  (2,410
                  )
                  
                  
                  (2,952
                  )Federal
      Home Loan Bank stock dividends
                  
                  
                  (458
                  )
                  
                  
                  (450
                  )Intangible
      assets
                  
                  
                  (1,580
                  )
                  
                  
                  (2,182
                  )Prepaid
      expenses
                  
                  
                  (514
                  )
                  
                  
                  (491
                  )Unrealized
      gain on securities available for sale
                  
                  
                  (1,522
                  )
                  
                  
                  (1,217
                  )Other
                  
                  
                  (34
                  )
                  
                  
                  (25
                  )Total
      deferred tax liabilities
                  
                  
                  (6,518
                  )
                  
                  
                  (7,317
                  )$
                  15,219
                  
                  
                  $
                  5,023





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





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





No
valuation allowance has been accrued for the deferred tax asset as it is more
likely than not that the deferred tax assets will be recognized in the
foreseeable future.





The
Company had no recognized uncertain tax positions as of December 31, 2009 and
2008 and therefore did not have any tax accruals in 2009 or 2008 related to
uncertain positions.


88





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 18:  Employee
Benefit Plans





Pension
Plan





The Bank
has a defined benefit pension plan covering substantially all full-time
employees of the Bank and subsidiaries. Benefits under this plan are based on
years of service and average annual compensation for a five year period. The
Bank froze benefit accruals under this plan effective September 30,
2001.





The
measurement date for actuarial calculations for the plan has historically been
October 1 of each year. On December 31, 2008, the Company transitioned to a
calendar year-end measurement date. The transition involved the charging of an
additional three months of net pension costs to retained earnings to compensate
for the interim measurement period of October 1 through December 31, 2008. The
following is a summary of the plan's funded status:





(Dollars
      in thousands)
                
                2009
                
                
                2008Change
      in benefit obligation:Projected
      benefit obligation at beginning of year
                
                $
                8,032
                
                
                $
                8,236Service
      cost
                
                
                -
                
                
                
                -Interest
      cost
                
                
                486
                
                
                
                460Measurement
      date transition effect
                
                
                -
                
                
                
                115Actuarial
      (gain) loss
                
                
                604
                
                
                
                (189
                )Benefit
      payments
                
                
                (479
                )
                
                
                (590
                )Projected
      benefit obligation at end of year
                
                
                8,643
                
                
                
                8,032Change
      in plan assets:Fair
      value of plan assets at beginning of year
                
                
                7,231
                
                
                
                9,417Actual
      return on plan assets
                
                
                1,175
                
                
                
                (2,364
                )Employer
      contributions
                
                
                204
                
                
                
                800Benefit
      payments
                
                
                (479
                )
                
                
                (590
                )Expenses
                
                
                (16
                )
                
                
                (32
                )Fair
      value of plan assets at end of year
                
                
                8,115
                
                
                
                7,231Funded
      status at measurement date
                
                $
                (528
                )
                
                $
                (801
                )





The
following is a summary of amounts recorded in the consolidated statements of
condition:





(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Net
      pension asset
                    
                    $
                    -
                    
                    
                    $
                    -Net
      pension liability
                    
                    $
                    (528
                    )
                    
                    $
                    (801
                    )Accumulated
      other comprehensiveincome,
      before income taxes
                    
                    $
                    3,476
                    
                    
                    $
                    4,423


89





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
18:  (Continued)





The
following is a summary of information related to benefit obligations and plan
assets:





(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Projected
      benefit obligation
                  
                  $
                  8,643
                  
                  
                  $
                  8,032Accumulated
      benefit obligation
                  
                  
                  8,643
                  
                  
                  
                  8,032Fair
      value of plan assets
                  
                  
                  8,115
                  
                  
                  
                  7,231





The
following is a summary of the components of accumulated other comprehensive
income:





(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Unamortized
      transition asset
                  
                  $
                  -
                  
                  
                  $
                  (7
                  )Unamortized
      prior service credit
                  
                  
                  (62
                  )
                  
                  
                  (99
                  )Unamortized
      actuarial loss
                  
                  
                  3,538
                  
                  
                  
                  4,529Accumulated
      other comprehensive income
                  
                  $
                  3,476
                  
                  
                  $
                  4,423





Components
of net periodic benefit costs and other amounts recognized in retained earnings
and other comprehensive income:





(Dollars
      in thousands)
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Net
      Periodic Benefit Cost:Service
      cost
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Interest
      cost
                                          
                                          
                                          486
                                          
                                          
                                          
                                          460
                                          
                                          
                                          
                                          473Expected
      return on plan assets
                                          
                                          
                                          (470
                                          )
                                          
                                          
                                          (619
                                          )
                                          
                                          
                                          (565
                                          )Amortization
      of transition asset
                                          
                                          
                                          (7
                                          )
                                          
                                          
                                          (9
                                          )
                                          
                                          
                                          (9
                                          )Amortization
      of prior service credit
                                          
                                          
                                          (37
                                          )
                                          
                                          
                                          (37
                                          )
                                          
                                          
                                          (37
                                          )Recognized
      actuarial loss
                                          
                                          
                                          906
                                          
                                          
                                          
                                          326
                                          
                                          
                                          
                                          417Net
      periodic benefit cost
                                          
                                          $
                                          878
                                          
                                          
                                          $
                                          121
                                          
                                          
                                          $
                                          279Other
      Changes in Plan Assets and Benefit ObligationsRecognized
      in Other Comprehensive Income:Net
      (gain) loss
                                          
                                          $
                                          (85
                                          )
                                          
                                          $
                                          2,981
                                          
                                          
                                          $
                                          (544
                                          )Amortization
      of actuarial net loss
                                          
                                          
                                          (906
                                          )
                                          
                                          
                                          (326
                                          )
                                          
                                          
                                          (417
                                          )Amortization
      of transition asset
                                          
                                          
                                          7
                                          
                                          
                                          
                                          9
                                          
                                          
                                          
                                          9Amortization
      of prior service credit
                                          
                                          
                                          37
                                          
                                          
                                          
                                          37
                                          
                                          
                                          
                                          37Measurement
      date transition adjustment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (70
                                          )
                                          
                                          
                                          -Total
      recognized in other comprehensive income
                                          
                                          $
                                          (947
                                          )
                                          
                                          $
                                          2,631
                                          
                                          
                                          $
                                          (915
                                          )Total
      recognized in net periodic benefit cost and othercomprehensive
      income
                                          
                                          $
                                          (69
                                          )
                                          
                                          $
                                          2,782
                                          
                                          
                                          $
                                          (636
                                          )Measurement
      Date Transition Amounts Recognized inRetained
      Earnings:Interest
      cost
                                          
                                          
                                          
                                          
                                          
                                          $
                                          115Expected
      return on plan assets
                                          
                                          
                                          
                                          
                                          
                                          
                                          (155
                                          )Amortization
      of transition asset
                                          
                                          
                                          
                                          
                                          
                                          
                                          (2
                                          )Amortization
      of prior service credit
                                          
                                          
                                          
                                          
                                          
                                          
                                          (9
                                          )Recognized
      actuarial loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          81Net
      measurement transition retained earnings adjustment
                                          
                                          
                                          
                                          
                                          
                                          $
                                          30





The
Company elected to amortize the unrecognized net gain or loss over a seven year
period on a straight-line basis starting in 2007. For plan years up through
2006, the unrecognized gain or loss was amortized based on the average remaining
service period of participants.





The
estimated net loss for the defined benefit pension plan that will be amortized
from accumulated other comprehensive income into net periodic pension cost
during 2010 is $884 thousand. The estimated prior service cost that will be
amortized from accumulated comprehensive income to reduce net periodic pension
cost during 2010 is $37 thousand.


90





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
18:  (Continued)





Total
expense recorded in the accompanying consolidated statements of operations
related to the pension plan included the following components:





(Dollars
      in thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Net
      pension cost
                      
                      $
                      878
                      
                      
                      $
                      121
                      
                      
                      $
                      279Payments
      for expenses made onbehalf
      of the plan
                      
                      
                      39
                      
                      
                      
                      33
                      
                      
                      
                      32Payments
      to (refunds of) PBGC premiums
                      
                      
                      15
                      
                      
                      
                      9
                      
                      
                      
                      (64
                      )$
                      932
                      
                      
                      $
                      163
                      
                      
                      $
                      247





The
following is a summary of weighted average assumptions:





2009
                  
                  
                  2008
                  
                  
                  2007Discount
      rate for determining current year’s costs
                  
                  
                  6.25
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %Discount
      rate for determining year end benefit obligation
                  
                  
                  5.60
                  %
                  
                  
                  6.25
                  %
                  
                  
                  5.75
                  %Expected
      return on plan assets for determining current year’s costs
                  
                  
                  6.75
                  %
                  
                  
                  6.75
                  %
                  
                  
                  6.75
                  %Rate
      of compensation increase (plan is frozen)
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  -
                  %





The
credit market disruptions and a severely slowing economy resulted in stock
market losses in excess of 35% in 2008. The markets recovered some of the 2008
losses during 2009, which resulted in positive plan returns. At the end of 2009,
there was still uncertainty about the ability to sustain an economic recovery
going forward. The lack of a market recovery would increase pension expense
which is dominated by the amortization of deferred actuarial gains and losses.
Plan returns or losses that negatively deviate from expected returns result in
increases in these actuarial deferred losses. Returns in excess of expectations
would reduce the deferred actuarial loss and therefore would reduce pension
expenses going forward.





The
Company estimates the long-term rate of return on plan assets using historical
returns, changes in asset mix, general economic conditions and industry
practice. Historical annual returns on plan assets have normally ranged from
losses of approximately 10% to gains in excess of 15%. The short-term volatility
of these returns makes them an unreliable indicator of future long-term returns.
Therefore, the historical plan rate of return is not used as a starting point,
but rather as a guideline in determining the plan assumption for returns. The
plan return was a 16.25% profit in 2009, a 28.4% loss in 2008 and a 9.1% profit
in 2007. The mix of invested assets has remained relatively stable over the last
five years with equity holdings representing between 45% and 60% of plan assets.
The equity securities have brought more return volatility and higher expected
returns to the portfolio. Management has operated under the general assumption
that the long-term equity market returns will approximate the past 50 years,
which provided an average 10% return, based upon stock market historical data.
Current and expected economic conditions have also been considered in
determining the estimate of long-term returns. Management also uses a survey of
pension plan managers provided by a third party which indicates the rate of
return assumptions that are predominant in the industry. At the end of 2006,
Management changed its investment horizon to coincide with the amortization
period of the unamortized actuarial gain or loss. The assumption concerning
expected returns for 2008 and 2009 was maintained at 2007 levels, which
reflected management’s view of expected market returns over the investment
horizon. The expected return assumption for 2010 is being maintained at the same
level as 2009. Management believes that the economy and the markets will recover
enough over the next 5 to 7 years to allow the Company to achieve an expectation
of 6.75% in annual returns over those periods. Management intends to terminate
the Plan within the next 5 to 7 years.





The
plan’s asset allocations at December 31, 2009, and 2008 by asset category were
as follows:





2009
                
                
                2008Interest-bearing
      bank balances
                
                
                17
                %
                
                
                34
                %Debt
      securities
                
                
                23
                %
                
                
                19
                %Equity
      securities
                
                
                60
                %
                
                
                47
                %100
                %
                
                
                100
                %





Equity
securities included 18,868 shares of the Company’s common stock at December 31,
2009, and 2008.


91





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
18:  (Continued)





The
following table summarizes the fair values of pension plan assets at December
31, 2009 by asset category.





Fair
      Value Measurements atDecember
      31, 2009, UsingQuotedPrices
      InActiveMarkets
                
                
                SignificantAssets/Liabilities
                
                
                For
                
                
                Other
                
                
                SignificantMeasured
      at Fair
                
                
                Identical
                
                
                Observable
                
                
                UnobservableValue
                
                
                Assets
                
                
                Inputs
                
                
                Inputs(Dollars
      in thousands)
                
                December
      31, 2009
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)Cash
      and cash equivalents
                
                $
                1,368
                
                
                $
                1,368
                
                
                $
                -
                
                
                $
                -Equity
      securities – domestic:Industrials
                
                
                535
                
                
                
                535
                
                
                
                -
                
                
                
                -Telecommunication
                
                
                61
                
                
                
                61
                
                
                
                -
                
                
                
                -Energy
      and Utilities
                
                
                505
                
                
                
                505
                
                
                
                -
                
                
                
                -Information
      technology
                
                
                778
                
                
                
                778
                
                
                
                -
                
                
                
                -Consumer
                
                
                665
                
                
                
                665
                
                
                
                -
                
                
                
                -Health
      care
                
                
                341
                
                
                
                341
                
                
                
                -
                
                
                
                -Financials
                
                
                276
                
                
                
                276
                
                
                
                -
                
                
                
                -Other
                
                
                337
                
                
                
                337
                
                
                
                -
                
                
                
                -Equity
      securities – international:Industrials
                
                
                136
                
                
                
                136
                
                
                
                -
                
                
                
                -Telecommunication
                
                
                73
                
                
                
                73
                
                
                
                -
                
                
                
                -Energy
      and Utilities
                
                
                90
                
                
                
                90
                
                
                
                -
                
                
                
                -Information
      technology
                
                
                18
                
                
                
                18
                
                
                
                -
                
                
                
                -Consumer
                
                
                59
                
                
                
                59
                
                
                
                -
                
                
                
                -Health
      care
                
                
                37
                
                
                
                37
                
                
                
                -
                
                
                
                -Financials
                
                
                127
                
                
                
                127
                
                
                
                -
                
                
                
                -Other
                
                
                605
                
                
                
                605
                
                
                
                -
                
                
                
                -Mutual
      funds(bond funds)
                
                
                260
                
                
                
                260
                
                
                
                -
                
                
                
                -Government
      debt securities
                
                
                1,081
                
                
                
                -
                
                
                
                1,081
                
                
                
                -Corporate
      debt securities
                
                
                571
                
                
                
                -
                
                
                
                571
                
                
                
                -Mortgage-backed
      securities
                
                
                192
                
                
                
                -
                
                
                
                192
                
                
                
                -Total
      assets
                
                $
                8,115
                
                
                $
                6,271
                
                
                $
                1,844
                
                
                $
                -





Cash and
cash equivalents – Cash and cash equivalents are funds held in commercial banks
with the book value equal to the market value.





Equity
securities – Equity securities are stocks traded on organized exchanges. The
closing price as disclosed by the exchange is used as the fair
value.





Mutual
funds – Mutual funds are primarily fixed-income funds. Fair values for these are
the net asset values (NAV) reported by the mutual fund sponsors.





Government,
corporate and mortgage-backed debt securities – Fair values for these debt
securities are provided by an independent third party pricing service that
primarily uses trading activity in the dealer market to determine market
prices.





The
investment policy of the pension plan is based upon three principles: (1) the
preservation of capital, (2) risk aversion, and (3) adherence to investment
discipline. Investment managers should make reasonable efforts to preserve
capital, understanding that losses may occur in individual securities.
Investment managers are to make reasonable efforts to control risk, and will be
evaluated regularly to ensure that the risk assumed is commensurate with the
given investment style and objectives. Investment managers are expected to
adhere to the investment management styles for which they were
hired.





The plan
investment objectives are: (1) income and growth, which is the primary
objective, and the secondary objectives of (2) liquidity and (3) preservation of
capital. The plan’s return objective is to achieve a balanced return of income
and modest growth of principle. The goal of the plan is to achieve an absolute
rate of return of 8% over the life of the plan. The secondary objectives ensure
(1) the ability to meet all expected or unexpected cash flow needs by investing
in securities which can be sold readily and efficiently and (2) the probability
of loss of principle over the investment horizon is minimized, effectively
emphasizing the minimizing of return volatility over the maximization of total
return. Individual investment managers will be required to manage toward a
market index, a blended index, or another target established by the Company’s
Retirement Committee that reflects the expected style of management. Each
individual portfolio manager is expected to display an overall level of risk in
the portfolio which is consistent with the risk associated with the benchmark
return. Risk is measured by the standard deviation of quarterly
returns.


92





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
18:  (Continued)





The
following table outlines the target asset allocations in percentages for plan
assets.





Minimum
                  
                  
                  Maximum
                  
                  
                  PreferredEquities
                  
                  
                  50
                  %
                  
                  
                  70
                  %
                  
                  
                  60
                  %Fixed-income
                  
                  
                  30
                  %
                  
                  
                  40
                  %
                  
                  
                  35
                  %Cash
                  
                  
                  2
                  %
                  
                  
                  8
                  %
                  
                  
                  5
                  %





Plan
assets are ultimately managed to provide for benefit payments. This is done by
providing for targeted returns, to assure that future benefit obligations will
be provided for, by providing income production as well as principle growth, and
by investing in assets that are liquid. The Company’s Retirement Committee
monitors expected cash flows and modifies the investment targets and allocations
to provide for those future needs.





Prohibited
investments include commodities and futures contracts, private placements,
options, limited partnerships, venture-capital investments, real estate
properties, interest-only (IO), principal-only (PO) and residual tranche CMO’s
and hedge funds. Prohibited transactions within the plan are short selling and
margin transactions.





Pension
benefit payments are made from assets of the pension plan. It is anticipated,
assuming no plan termination, that future benefit payments for the plan will be
as follows.





(Dollars
      in thousands)Year
                  
                  Expected
      payments2010
                  
                  $
                  5772011
                  
                  
                  5862012
                  
                  
                  6252013
                  
                  
                  6702014
                  
                  
                  6632015
      – 2019
                  
                  
                  3,292





The
Company expects to make a contribution within a range of $100 thousand to $400
thousand to the pension plan in 2010.





Profit and Savings
Plan





The Bank
has a profit and savings plan which includes features such as an Employee Stock
Ownership Plan (ESOP) and a 401(k) plan which provides for certain salary
deferrals, covering substantially all full-time employees of the Bank and
subsidiaries. The Bank matched employee 401(k) contributions equal to 50% of an
employee's first 5% of salary deferral through 2004. Beginning in 2005, the
Company matched contributions equal to 50% of an employee’s first 6% of salary
deferral. Effective in May 2006, the Company began matching 60% of an employee’s
first 6% of salary deferral for all employees with less than five years of
credited service. Concurrently, the Company began matching 75% of an employee’s
first 6% of salary deferral for all employees with five years or more of
credited service. In March 2009 the Company cut the matching percentages in
half. Total matching contributions for this plan were $385 thousand in 2009,
$712 thousand in 2008 and $723 thousand in 2007. During 2004, the Company began
making matching contributions on a monthly basis rather than on an annual basis.
Additional contributions to the plan are at the discretion of the Board of
Directors. Discretionary contributions, which are invested in the Company’s
common stock, for this plan were $75 thousand in 2009, 2008 and 2007. ESOP
shares are considered outstanding for basic earnings per share calculations.
Dividends on ESOP shares are deducted from retained earnings when
declared.





At
December 31, 2009, and 2008, the profit and savings plan owned 257,879 and
207,914 shares of the Company's common stock.





Nonqualified Deferred
Compensation Plan





The Bank
has a nonqualified deferred compensation plan for senior officers and executives
of the Bank and its subsidiaries. The plan allows for the deferral of salary by
the participants with the Company having the option of also making matching
contributions and profit sharing contributions. The participant’s earnings
credits are indexed to selected mutual fund returns. Matching contributions and
profit sharing contributions vest evenly over a five (5) year period. The
Company will use the earnings of Bank-owned life insurance policies to provide
sufficient revenues to offset the cost of the liabilities incurred by
participant earnings credits. Participants deferred $67 thousand of compensation
during 2009, $95 thousand during 2008 and $106 thousand during 2007. The Company
did not make any profit sharing contributions to the plan in 2009, 2008 or 2007.
The plan also had distributions of $80 thousand in 2009, $34 thousand in 2008
and $5 thousand in 2007. Included in salaries and employee benefit expenses are
charges for earnings increases of $2 thousand for 2009, $79 thousand in credits
for earnings declines for 2008 and charges for earnings increases of $55
thousand for 2007. Also included in salaries and employee benefit expenses are
administrative expenses of $3 thousand in 2009, $2 thousand in 2008 and $5
thousand in 2007.


93





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note 19:  Earnings
Per Share





A change
in accounting principles for earnings per share 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)
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007Net
      income (loss)
                                
                                $
                                (59,799
                                )
                                
                                $
                                526
                                
                                
                                $
                                14,458Preferred
      dividends
                                
                                
                                1,464
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      income (loss) attributable to common stock
                                
                                $
                                (61,263
                                )
                                
                                $
                                526
                                
                                
                                $
                                14,458Net
      income (loss) allocated to common stockholders:Distributed
                                
                                
                                1,451
                                
                                
                                
                                4,712
                                
                                
                                
                                4,711Undistributed
                                
                                
                                (62,106
                                )
                                
                                
                                (4,190
                                )
                                
                                
                                9,567$
                                (60,655
                                )
                                
                                $
                                522
                                
                                
                                $
                                14,278Weighted-average
      basic common and participatingshares
      outstanding
                                
                                
                                9,157,752
                                
                                
                                
                                9,179,118
                                
                                
                                
                                9,175,649Less:
      weighted average participating restricted sharesoutstanding
                                
                                
                                90,872
                                
                                
                                
                                117,388
                                
                                
                                
                                115,512Weighted-average
      basic shares outstanding
                                
                                
                                9,066,880
                                
                                
                                
                                9,061,730
                                
                                
                                
                                9,060,137Basic
      net income (loss) per share
                                
                                $
                                (6.69
                                )
                                
                                $
                                0.06
                                
                                
                                $
                                1.58Weighted-average
      basic common and participatingshares
      outstanding
                                
                                
                                9,157,752
                                
                                
                                
                                9,179,118
                                
                                
                                
                                9,175,649Add:
      share-based options and stock warrant
                                
                                
                                -
                                
                                
                                
                                654
                                
                                
                                
                                11,3199,157,752
                                
                                
                                
                                9,179,772
                                
                                
                                
                                9,186,968Less:
      weighted average participating restricted sharesoutstanding
                                
                                
                                90,872
                                
                                
                                
                                117,388
                                
                                
                                
                                115,512Weighted-average
      dilutive shares outstanding
                                
                                
                                9,066,880
                                
                                
                                
                                9,062,384
                                
                                
                                
                                9,071,456Dilutive
      net income (loss) per share
                                
                                $
                                (6.69
                                )
                                
                                $
                                0.06
                                
                                
                                $
                                1.57Weighted-average
      shares of potentially dilutiveinstruments
      that are not included in the dilutive sharecalculation
      due to anti-dilutive effect:Compensation
      plan-related stock options
                                
                                
                                62,184
                                
                                
                                
                                128,186
                                
                                
                                
                                16,342Common
      stock warrant
                                
                                
                                432,983
                                
                                
                                
                                -
                                
                                
                                
                                -


94





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
20:  Regulatory Matters





Federal
banking regulations require that the Bank maintain certain cash reserves based
on a percent of deposits. This requirement was $2.053 million, which was covered
by $13.239 million in vault cash, at December 31, 2009. The Company is also
required to hold a clearing balance of $2.000 million with the Federal Reserve.
This clearing balance is included in cash and due from banks.





The
Company holds $200 thousand in certificates of deposit in commercial banks as
compensating balances for a third party debit card processor and a third party
credit card originator. The certificates of deposit are included in
interest-bearing bank balances.





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 December 31, 2009, that all
capital adequacy requirements have been met.





As of
December 31, 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.





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





(Dollars
      in thousands)
                
                Actual
                
                
                Minimum
      Capital
                
                
                Well
      CapitalizedAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioDecember
      31, 2009:Total
      capital (to risk weighted assets):Company
                
                $
                133,574
                
                
                
                11.1
                %
                
                $
                96,374
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                -Bank
                
                
                130,960
                
                
                
                10.9
                %
                
                
                96,293
                
                
                
                8.0
                %
                
                
                120,366
                
                
                
                10.0
                %Tier
      I capital (to risk weighted assets):Company
                
                
                118,405
                
                
                
                9.8
                %
                
                
                48,187
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                115,803
                
                
                
                9.6
                %
                
                
                48,147
                
                
                
                4.0
                %
                
                
                72,220
                
                
                
                6.0
                %Tier
      I capital (to average assets):Company
                
                
                118,405
                
                
                
                7.1
                %
                
                
                66,346
                
                
                
                4.0
                %
                
                
                -
                
                
                
                -Bank
                
                
                115,803
                
                
                
                7.0
                %
                
                
                66,339
                
                
                
                4.0
                %
                
                
                82,924
                
                
                
                5.0
                %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
                %


95




FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
20:  (Continued)





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





The Bank
is required to get prior approval from its primary regulators, the Federal
Deposit Insurance Corporation and the State of Mississippi Department of Banking
and Consumer Finance, to pay dividends to the Company. Said approval was denied
for the fourth quarter of 2009 and the first quarter of 2010 due to the Bank’s
current operating losses.





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





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


96





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
21:  Summarized Financial Information of First M & F
Corporation





Summarized
financial information of First M & F Corporation (parent company only) is as
follows:





STATEMENTS
OF CONDITION





(Dollars
      in thousands)Assets
                
                2009
                
                
                2008Cash
                
                $
                4,735
                
                
                $
                413Investment
      in banking subsidiary
                
                
                131,179
                
                
                
                167,153Investment
      in statutory trust
                
                
                928
                
                
                
                928Other
      assets
                
                
                912
                
                
                
                894$
                137,754
                
                
                $
                169,388Liabilities
      and Stockholders’ EquityNote
      payable
                
                $
                1,916
                
                
                $
                2,416Junior
      subordinated debt
                
                
                30,928
                
                
                
                30,928Other
      liabilities
                
                
                281
                
                
                
                94Stockholders’
      equity
                
                
                104,629
                
                
                
                135,950$
                137,754
                
                
                $
                169,388





STATEMENTS
OF OPERATIONS





(Dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007Income:Dividends
      received from banking subsidiary
                
                $
                3,800
                
                
                $
                4,500
                
                
                $
                14,500Dividends
      received from statutory trust
                
                
                60
                
                
                
                60
                
                
                
                60Equity
      in undistributed earnings (loss) of banking subsidiary
                
                
                (59,869
                )
                
                
                (2,578
                )
                
                
                1,432Other
      income
                
                
                24
                
                
                
                2
                
                
                
                2Total
      income (loss)
                
                
                (55,985
                )
                
                
                1,984
                
                
                
                15,994Expenses:Interest
      on other borrowings
                
                
                64
                
                
                
                99
                
                
                
                229Interest
      on junior subordinated debentures
                
                
                1,992
                
                
                
                1,993
                
                
                
                1,991Goodwill
      impairment
                
                
                2,310
                
                
                
                -
                
                
                
                -Other
      expenses
                
                
                291
                
                
                
                194
                
                
                
                190Total
      expenses
                
                
                4,657
                
                
                
                2,286
                
                
                
                2,410Income
      (loss) before income taxes
                
                
                (60,642
                )
                
                
                (302
                )
                
                
                13,584Income
      tax benefit
                
                
                843
                
                
                
                828
                
                
                
                874Net
      income (loss)
                
                $
                (59,799
                )
                
                $
                526
                
                
                $
                14,458


97





FIRST
M&F CORPORATION AND SUBSIDIARY


Notes to
Consolidated Financial Statements





Note
21:  (Continued)





STATEMENTS
OF CASH FLOWS





(Dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (59,799
                )
                
                $
                526
                
                
                $
                14,458Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed (earnings) loss of banking subsidiary
                
                
                59,869
                
                
                
                2,578
                
                
                
                (1,432
                )Goodwill
      impairment
                
                
                2,310
                
                
                
                -
                
                
                
                -Other,
      net
                
                
                (45
                )
                
                
                1,390
                
                
                
                (975
                )Net
      cash provided by operating activities
                
                
                2,335
                
                
                
                4,494
                
                
                
                12,051Cash
      flows from investing activities:Additional
      investment in Bank
                
                
                (25,000
                )
                
                
                -
                
                
                
                -Net
      cash used in investing activities
                
                
                (25,000
                )
                
                
                -
                
                
                
                -Cash
      flows from financing activities:Increase
      (decrease) in note payable
                
                
                (500
                )
                
                
                500
                
                
                
                (8,500
                )Cash
      dividends
                
                
                (2,541
                )
                
                
                (4,772
                )
                
                
                (4,772
                )Common
      shares issued
                
                
                -
                
                
                
                -
                
                
                
                305Common
      shares repurchased
                
                
                -
                
                
                
                (118
                )
                
                
                -Preferred
      stock issued
                
                
                30,000
                
                
                
                -
                
                
                
                -Tax
      benefits on stock option transactions
                
                
                28
                
                
                
                -
                
                
                
                87Cash
      paid to cancel options
                
                
                -
                
                
                
                -
                
                
                
                (174
                )Net
      cash provided by (used in) financing activities
                
                
                26,987
                
                
                
                (4,390
                )
                
                
                (13,054
                )Net
      increase (decrease) in cash
                
                
                4,322
                
                
                
                104
                
                
                
                (1,003
                )Cash
      at January 1
                
                
                413
                
                
                
                309
                
                
                
                1,312Cash
      at December 31
                
                $
                4,735
                
                
                $
                413
                
                
                $
                309


98





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M&F CORPORATION AND SUBSIDIARY





CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS


ON
ACCOUNTING AND FINANCIAL DISCLOSURE





On June
5, 2008, the Company reported on Form 8-K that the business of its independent
public accounting firm, Shearer, Taylor & Co., P.A. had been acquired by
BKD, LLP.  BKD, LLP was appointed and approved by the Company’s audit
committee as the Company’s independent registered public accounting firm
effective June 1, 2008 for the year ended December 31, 2008.





Effective
as of January 1, 2009, the Company’s audit committee has appointed BKD, LLP, a
firm of independent certified public accountants, as auditors for the fiscal
year ending December 31, 2009 and until their successors are
selected.





The
Company has been advised that neither the firm nor any of its partners has any
direct or material indirect financial interest in the securities of the Company
or any of its subsidiaries, except as auditors and consultants on accounting
procedures and tax matters.





Additionally, during the two fiscal
years ended December 31, 2008 and 2007, there were no consultations between the
Company and BKD, LLP regarding:  the application of accounting
principles to a specified transaction (either completed or proposed); the type
of audit opinion that might be rendered on the Company’s financial statements;
or any matter that was either the subject of a “disagreement,” as defined in
Item 304(a)(1)(iv) of Regulation S-K and the instructions thereto; or a
“reportable event,” as defined in Item 304(a)(1)(v) of Regulation S-K; or any
other matter.





CONTROLS
AND PROCEDURES





Disclosure 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
December 31, 2009 (the "Evaluation Date"), the Company's Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures as defined in the Exchange Act
Rules.  Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are sufficiently effective to ensure that material
information relating to the Company and required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.





Management’s
Annual Report on Internal Control over Financial Reporting is contained on page
48 of this Annual Report on Form 10-K and is hereby incorporated by
reference.





Design and Evaluation of
Internal Control Over Financial Reporting





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report
of management’s assessment of the design and effectiveness of its internal
controls as part of this Annual Report on Form 10-K for the year ended December
31, 2009. Management’s report is included in the section, Financial Statements
and Supplementary Data of this Annual Report on Form 10-K, under the heading
“Management’s Annual Report on Internal Control Over Financial
Reporting.”





Changes in 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.





OTHER
INFORMATION





None.


99





FIRST
M&F CORPORATION AND SUBSIDIARY





PART
III





DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Information
concerning directors, executive officers and corporate governance of the
registrant is incorporated by reference and contained in the proxy material on
Page 3 and following.





The
Company's Board of Directors has adopted a Code of Ethics that applies to the
Company's principal executive officer, principal financial officer, principal
accounting officer, or persons performing similar functions. A copy of this Code
of Ethics can be found at the Company's internet website at www.mfbank.com. The Company intends to disclose
any amendments to its Code of Ethics, and any waiver from a provision of the
Code of Ethics granted to the Company's principal executive officer, principal
financial officer, principal accounting officer, or persons performing similar
functions, on the Company's internet website within five business days following
such amendment or waiver. The information contained on or connected to the
Company's internet website is not incorporated by reference into this Form 10-K
and should not be considered part of this or any other report that we file with
or furnish to the SEC.





As a
CPP/TARP recipient the Company is required to have an Excessive Expenditure
Policy. Such a policy was adopted by the Company’s Board of Directors on October
14, 2009 and is posted on the Bank’s website at
www.mfbank.com/inv_governance.htm.





EXECUTIVE
COMPENSATION




Information
concerning executive compensation is incorporated by reference and contained in
the proxy material on Page 9 and following.




SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




Information
concerning security ownership of owners and management is incorporated by
reference and contained in the proxy material on Page 6 and
following.







CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE




Information
concerning certain relationships and related transactions is incorporated by
reference and contained in the proxy material on Page 24.





PRINCIPAL
ACCOUNTING FEES AND SERVICES


(Last
Two Fiscal Years)





Information
concerning principal accounting fees and services, as well as information
concerning the Company’s audit committee pre-approval policies and procedures,
is incorporated by reference and contained in the proxy material on Page
24.


100





FIRST
M&F CORPORATION AND SUBSIDIARY





PART
IV





EXHIBITS,
FINANCIAL STATEMENT SCHEDULES





Financial Statements and Exhibits





The
following financial statements included under the heading "Financial Statements
and Supplementary Data" are included in this report:





(a)
            Management’s
      Annual Report on Internal Control Over Financial
  Reporting


(b)
            Report
      of Independent Registered Public Accounting
Firm


(c)
            Consolidated
      Statements of Condition – December 31, 2009 and
  2008


(d)
            Consolidated
      Statements of Operations – Years Ended December 31, 2009, 2008 and
      2007


(e)
            Consolidated
      Statements of Comprehensive Income – Years Ended December 31, 2009, 2008
      and 2007


(f)
            Consolidated
      Statements of Stockholders’ Equity – Years Ended December 31, 2009, 2008
      and 2007


(g)
            Consolidated
      Statements of Cash Flows – Years Ended December 31, 2009, 2008 and
      2007


(h)
            Notes
      to Consolidated Financial
Statements





The
following exhibits have been filed with the Securities and Exchange Commission
and are available upon written request:





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 19 to the consolidated
      financial statements.





21
            Subsidiaries
      of the Registrant





23
            Consent
      of Independent Registered Public Accounting
Firm





The
following Rule 13a-14(a)/15d-14(a) Certifications are included as exhibits to
this report:





31.1
            Rule
      13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive
      Officer





31.2
            Rule
      13a-14(a) Certification of John G. Copeland, Chief Financial
      Officer





The
following Section 1350 Certifications are included as exhibits to this
report:





32.1
            Section
      1350 Certification of Hugh S. Potts, Jr., Chief Executive
      Officer





32.2
            Section
      1350 Certification of John G. Copeland, Chief Financial
      Officer





The
following Emergency Economic Stability Act of 2008 Certifications are included
as exhibits to this report:





99.1
            Certification
      pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts,
      Jr., Chief Executive Officer





99.2
            Certification
      pursuant to the Emergency Economic Stability Act of 2008 of John G.
      Copeland, Chief Financial
Officer


101





FIRST
M&F CORPORATION AND SUBSIDIARY





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





BY:
                      /s/ Hugh S. Potts, Jr.Hugh
      S. Potts, Jr.Chairman
      of the Board andChief
      Executive OfficerDATE:
                      March
      16,
2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:





/s/ Hugh S. Potts, Jr.DATE:  March
      16, 2010
              Hugh
      S. Potts, Jr., DirectorChairman
      of the BoardChief
      Executive Officer(principal
      executive officer)/s/ Hollis C. CheekDATE:  March
      16, 2010
              Hollis
      C. Cheek, Director/s/ Jon A. CrockerDATE:  March
      16, 2010
              Jon
      A. Crocker, Director/s/ Toxey Hall, IIIDATE:  March
      16, 2010
              Toxey
      Hall, III, Director/s/ J. Marlin IveyDATE:  March
      16, 2010
              J.
      Marlin Ivey, Director/s/ Jeffrey B. LaceyDATE:  March
      16, 2010
              Jeffrey
      B. Lacey, DirectorPresident
      &Chief
      Banking Officer/s/ John Clark Love, IIIDATE:  March
      16, 2010
              John
      Clark Love, III, Director/s/ Susan P. McCafferyDATE:  March
      16, 2010
              Susan
      P. McCaffery, Director/s/ Michael L. NelsonDATE:  March
      16, 2010
              Michael
      L. Nelson, Director/s/ Otho E. Pettit, Jr.DATE:  March
      16, 2010
              Otho
      E. Pettit, Jr., Director/s/ Samuel B. PottsDATE:  March
      16, 2010
              Samuel
      B. Potts, DirectorVice
      President/s/ Charles W. Ritter,
  Jr.DATE:  March
      16, 2010
              Charles
      W. Ritter, Jr., Director/s/ L. F. Sams, Jr.DATE:  March
      16, 2010
              L.
      F. Sams, Jr., Director


102





FIRST
M&F CORPORATION AND SUBSIDIARY





Signatures:
(Continued)





/s/ Michael W. SandersDATE:  March
      16, 2010
              Michael
      W. Sanders, Director/s/ Larry TerrellDATE:  March
      16, 2010
              Larry
      Terrell, Director/s/ James I. TimsDATE:  March
      16, 2010
              James
      I. Tims, Director/s/ Scott M. WiggersDATE:  March
      16, 2010
              Scott
      M. Wiggers, Director/s/ John G. CopelandDATE:  March
      16, 2010
              John
      G. CopelandEVP
      & Chief Financial Officer(principal
      financial officer)/s/ Robert C. Thompson,
  IIIDATE:  March
      16, 2010
              Robert
      C. Thompson, IIIVP
      – Accounting Policy(principal
      accounting officer)


103





FIRST
M&F CORPORATION AND SUBSIDIARY





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 19 to the consolidated
      financial statements.21
                  
                  Subsidiaries
      of the Registrant.23
                  
                  Consent
      of Independent Registered Public Accounting Firm.31.1
                  
                  Rule
      13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive
      Officer.31.2
                  
                  Rule
      13a-14(a) Certification of John G. Copeland, Chief Financial
      Officer.32.1
                  
                  Section
      1350 Certification of Hugh S. Potts, Jr., Chief Executive
      Officer.32.2
                  
                  Section
      1350 Certification of John G. Copeland, Chief Financial
      Officer.99.1
                  
                  Certification
      pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts,
      Jr., Chief Executive Officer99.2
                  
                  Certification
      pursuant to the Emergency Economic Stability Act of 2008 of John G.
      Copeland, Chief Financial
Officer


104