UNITED
                STATESSECURITIES
                AND EXCHANGE COMMISSIONWashington,
                D.C. 20549**FORM
                10-K****x
                ANNUAL REPORT
                PURSUANT TO SECTION 13 OR 15(d) OF****THE
                SECURITIES EXCHANGE ACT OF 1934**For
                the fiscal year ended December 31, 2007or**o
                TRANSITION REPORT
                PURSUANT TO SECTION 13 OR 15(D) OF****THE
                SECURITIES EXCHANGE ACT OF 1934**For
                the transition period from __________ to __________**Commission
                File Number 000-09424****FIRST
                M&F CORPORATION**(Exact
                name of registrant as specified in its
                charter)


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





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





Securities
                registered pursuant to section 12(g) of the
                Act:





None
            None(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 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, or a non-accelerated filer.


Large
      accelerated filer o  Accelerated
      filer x   Non-accelerated
      filer
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
      closing sale price for shares on June 30, 2007, the aggregate market value
      of
      the voting stock held by non-affiliates of the
      Registrant was $126,951,210.




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
            9,191,096
                SharesTitle
                of Class
            Shares
                Outstanding at January 31, 2008





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Proxy Statement dated March 12, 2008 are incorporated by reference into
      Part III of the Form 10-K report.










FIRST
      M&F CORPORATION AND SUBSIDIARY





**CROSS
      REFERENCE INDEX**





**Page****PART
                I**Item
                1
            Business
            3Item
                1A
            Risk
                Factors
            11Item
                1B
            Unresolved
                Staff Comments
            13Item
                2
            Properties
            13Item
                3
            Legal
                Proceedings
            13Item
                4
            Submission
                of Matters to a Vote of Security Holders
            13**PART
                II**Item
                5
            Market
                for Registrant’s Common Equity and Related Stockholder
                Matters
            14Item
                6
            Selected
                Financial Data
            16Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            30Item
                8
            Financial
                Statements and Supplementary Data
            31Item
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            70Item
                9A
            Controls
                and Procedures
            70Item
                9B
            Other
                Information
            70**PART
                III**Item
                10
            Directors,
                Executive Officers and Corporate Governance
            70Item
                11
            Executive
                Compensation
            71Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management
            71Item
                13
            Certain
                Relationships and Related Transactions
            71Item
                14
            Principal
                Accountant Fees and Services
            71**PART
                IV**Item
                15
            Exhibits
            71





*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).





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 $1.650 billion at December 31, 2007. 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, Bruce, Brandon, 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, Collierville, 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 banking
      locations in the Florida panhandle in Crestview and Niceville.





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.
      Since March 2000, the Bank has owned 51% of Merchants Financial Services, an
      accounts receivable factoring business, 49% of which is owned by an unaffiliated
      company. The factoring business has been consolidated into the Company's
      financial statements for reporting purposes. Merchants Financial Services sold
      substantially all of its receivables to its two owners as of December 31, 2004,
      and has subsequently been inactive.





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
      main
      office and discount brokerage services are offered through the Madison, Tupelo
      and Riverchase offices.





As
      of
      December 31, 2007, the Company and its subsidiary employed 564 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 2007 were as follows:





*Facilities*





·
            In
                June 2007 opened a new branch facility in Cordova,
                Tennessee


·
            In
                July 2007 opened new branch facilities in Ridgeland and Brandon,
                Mississippi


·
            In
                November 2007 opened a full service branch in Niceville,
                Florida





*Earnings*





·
            Return
                on assets for 2007 was .92% while the return on equity was 10.78%.
                Return
                on assets for 2006 was .94% while the return on equity was
                11.39%


·
            Debit
                card revenues grew by 20.91%, composing 16.92% of deposit
                revenues


·
            Mortgage
                banking revenues increased by 14.75% while originations grew to $73.2
                million in 2007


·
            Property,
                casualty, life and health insurance commissions increased by 5.92%
                to $3.9
                million





*Other*





·
            Loans
                held for investment grew by 12.15% in
                2007


·
            Deposits
                grew by 6.45% in 2007


·
            Net
                charge offs, as a percentage of average loans, were .28% for 2007,
                while
                nonperforming loans, as a percentage of total loans, were .62% at
                the end
                of 2007


·
            The
                Board of Directors approved a stock repurchase program for the purchase
                of
                up to 500,000 shares in 2008





In
      the
      opinion of Management, the challenges and opportunities facing the Company
      going
      forward from December 31, 2007 are as follows:





·
            To
                execute a sales and growth strategy in and around the Memphis, Tennessee;
                Birmingham, Alabama; and Crestview, Florida
                markets


·
            Continue
                branch expansion in economically strong
                markets


·
            Continue
                the sales and service initiative that was implemented in 2006 designed
                to
                improve customer satisfaction, improve customer retention, and grow
                market
                share


·
            Streamline
                and improve the demand deposit product offerings to provide enhanced
                value
                to customers and build core
                deposits


·
            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


·
            Use
                core deposit growth as the primary funding source for lending
                activities


·
            Continue
                to build the retail investment brokerage
                business


·
            Continue
                to stratify, monitor and manage risks in the real estate lending
                portfolio


·
            Monitor
                credit risks and pricing to ensure that rates and other terms on
                credit
                products reflect the appropriate amount of
                risk


·
            Contain
                expenses in current operations while also focusing on expansion into
                new
                locations and markets


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


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


·
            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 leverages 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.





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.





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.
      Additionally, the Company’s independent registered public accounting firm is
      required to attest to the effectiveness of internal controls over financial
      reporting.





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, 2007, the Company and the Bank were in
      compliance with the total capital ratio and the Tier 1 capital ratio
      requirements. Note 21 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"). Based on the latest
      information for the Bank assessments for BIF- and SAIF-insured deposits will
      approximate 1.345 basis points per $100 of deposits for the first quarter of
      2008. An additional assessment of .285 basis points is expected to be assessed
      related to the repayment of the FICO debt. The Federal Deposit Insurance Reform
      Act of 2005 allows “eligible insured depository institutions” to share a
      one-time assessment credit pool of approximately $4.7 billion. Assessment
      credits will be applied to reduce deposit insurance assessments, not to include
      FICO assessments, payable after the one-time credit regulations become
      effective. The Bank has a credit of approximately $621 thousand available.
      The
      Bank expects to use its remaining credits by June 30, 2008.





**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.





6





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)*
            
            2007
            
            2006
            
            2005Average
            
            
            
            Yield/
            
            Average
            
            
            
            Yield/
            
            Average
            
            
            
            Yield/Balance
            
            Interest
            
            Cost
            
            Balance
            
            Interest
            
            Cost
            
            Balance
            
            Interest
            
            CostInterest-bearing
                bank balances
            
            $
            4,693
            
            $
            225
            
            
            4.79
            %
            $
            6,538
            
            $
            247
            
            
            3.78
            %
            $
            2,832
            
            $
            76
            
            
            2.68
            %Federal
                funds sold
            
            
            3,388
            
            
            144
            
            
            4.25
            
            
            12,248
            
            
            543
            
            
            4.43
            
            
            7,566
            
            
            194
            
            
            2.56Taxable
                investments
            
            
            197,167
            
            
            9,514
            
            
            4.83
            
            
            188,148
            
            
            8,695
            
            
            4.62
            
            
            139,753
            
            
            5,797
            
            
            4.15Tax-exempt
                investments
            
            
            45,875
            
            
            2,867
            
            
            6.25
            
            
            49,430
            
            
            3,091
            
            
            6.25
            
            
            50,314
            
            
            3,228
            
            
            6.42Loans
            
            
            1,156,436
            
            
            90,403
            
            
            7.82
            
            
            1,065,366
            
            
            80,196
            
            
            7.53
            
            
            893,317
            
            
            59,521
            
            
            6.66Total
                earning assets
            
            
            1,407,559
            
            
            103,153
            
            
            7.33
            
            
            1,321,730
            
            
            92,772
            
            
            7.02
            
            
            1,093,782
            
            
            68,816
            
            
            6.29Nonearning
                assets
            
            
            166,071
            
            
            
            
            
            
            
            
            160,283
            
            
            
            
            
            
            
            
            115,272Total
                average assets
            
            $
            1,573,630
            
            
            
            
            
            
            
            $
            1,482,013
            
            
            
            
            
            
            
            $
            1,209,054NOW
                & MMDA
            
            
            324,649
            
            
            6,124
            
            
            1.89
            
            
            342,049
            
            
            5,811
            
            
            1.70
            
            
            330,566
            
            
            4,618
            
            
            1.40Savings
                deposits
            
            
            101,367
            
            
            2,816
            
            
            2.78
            
            
            94,653
            
            
            2,122
            
            
            2.24
            
            
            84,282
            
            
            1,523
            
            
            1.81Certificates
                of deposit
            
            
            599,393
            
            
            27,692
            
            
            4.62
            
            
            532,041
            
            
            21,710
            
            
            4.08
            
            
            394,344
            
            
            11,587
            
            
            2.94Short-term
                borrowings
            
            
            12,445
            
            
            609
            
            
            4.89
            
            
            8,787
            
            
            417
            
            
            4.75
            
            
            19,056
            
            
            776
            
            
            4.07Other
                borrowings
            
            
            208,738
            
            
            10,635
            
            
            5.09
            
            
            186,310
            
            
            9,096
            
            
            4.88
            
            
            117,088
            
            
            4,680
            
            
            4.00Total
                interest-bearing liabilities
            
            
            1,246,592
            
            
            47,876
            
            
            3.84
            
            
            1,163,840
            
            
            39,156
            
            
            3.36
            
            
            945,336
            
            
            23,184
            
            
            2.45Noninterest-bearing
                deposits
            
            
            182,598
            
            
            
            
            
            
            
            
            184,638
            
            
            
            
            
            
            
            
            140,036Noninterest-bearing
                liabilities
            
            
            10,357
            
            
            
            
            
            
            
            
            11,247
            
            
            
            
            
            
            
            
            7,959Capital
            
            
            134,083
            
            
            
            
            
            
            
            
            122,288
            
            
            
            
            
            
            
            
            115,723Total
                avg. liabilities & equity
            
            $
            1,573,630
            
            
            
            
            
            
            
            $
            1,482,013
            
            
            
            
            
            
            
            $
            1,209,054Net
                interest margin
            
            
            
            
            
            55,277
            
            
            3.93
            
            
            
            
            
            53,616
            
            
            4.06
            
            
            
            
            
            45,632
            
            
            4.17Less
                tax equivalent adjustmentInvestments
            
            
            
            
            
            1,069
            
            
            0.08
            
            
            
            
            
            1,153
            
            
            0.09
            
            
            
            
            
            1,204
            
            
            0.11Loans
            
            
            
            
            
            168
            
            
            0.01
            
            
            
            
            
            114
            
            
            0.01
            
            
            
            
            
            78
            
            
            0.01Reported
                book net interest margin
            
            
            
            
            $
            54,040
            
            
            3.84
            %
            
            
            
            $
            52,349
            
            
            3.96
            %
            
            
            
            $
            44,350
            
            
            4.05
            %




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**





2007 Compared To 2006
            
            2006 Compared To 2005*(Dollars
                in thousands)*
            
            Increase (Decrease) Due To
            
            Increase (Decrease) Due ToYield/
            
            
            
            
            
            Yield/Volume
            
            Cost
            
            Net
            
            Volume
            
            Cost
            
            NetInterest
                earned on:Interest-bearing
                bank balances
            
            $
            (79
            )
            $
            57
            
            $
            (22
            )
            $
            120
            
            $
            51
            
            $
            171Federal
                funds sold
            
            
            (385
            )
            
            (14
            )
            
            (399
            )
            
            164
            
            
            185
            
            
            349Taxable
                investments
            
            
            426
            
            
            393
            
            
            819
            
            
            2,122
            
            
            776
            
            
            2,898Tax-exempt
                investments
            
            
            (224
            )
            
            -
            
            
            (224
            )
            
            (56
            )
            
            (81
            )
            
            (137
            )Loans
            
            
            6,987
            
            
            3,220
            
            
            10,207
            
            
            12,207
            
            
            8,468
            
            
            20,675Total
                earning assets
            
            
            6,155
            
            
            4,226
            
            
            10,381
            
            
            15,171
            
            
            8,785
            
            
            23,956Interest
                paid on:NOW
                & MMDA
            
            
            (312
            )
            
            625
            
            
            313
            
            
            178
            
            
            1,015
            
            
            1,193Savings
                deposits
            
            
            169
            
            
            525
            
            
            694
            
            
            210
            
            
            389
            
            
            599Certificates
                of deposit
            
            
            2,930
            
            
            3,052
            
            
            5,982
            
            
            4,832
            
            
            5,291
            
            
            10,123Short-term
                borrowings
            
            
            176
            
            
            16
            
            
            192
            
            
            (453
            )
            
            94
            
            
            (359
            )Other
                borrowings
            
            
            1,119
            
            
            420
            
            
            1,539
            
            
            3,073
            
            
            1,343
            
            
            4,416Total
                interest-bearing liabilities
            
            
            2,981
            
            
            5,739
            
            
            8,720
            
            
            6,355
            
            
            9,617
            
            
            15,972Change
                in net interest income on a tax-equivalent basis
            
            $
            3,174
            
            $
            (1,513
            )
            $
            1,661
            
            $
            8,816
            
            $
            (832
            )
            $
            7,984




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





7




FIRST
      M&F CORPORATION AND SUBSIDIARY





**Table
      3**





**SECURITIES
      AVAILABLE FOR SALE**





Carrying
                Value of SecuritiesDecember
                31*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Securities
                Available For SaleU.S.
                Treasury
            
            $
            3,534
            
            $
            3,964
            
            $
            3,963U.S.
                Government sponsored entities
            
            
            70,167
            
            
            110,720
            
            
            69,068Mortgage-backed
                securities
            
            
            102,114
            
            
            85,931
            
            
            49,504Obligations
                of states and political subdivisions
            
            
            52,519
            
            
            50,943
            
            
            52,874Other
                securities
            
            
            8,804
            
            
            10,270
            
            
            9,662Total
                securities available for sale
            
            $
            237,138
            
            $
            261,828
            
            $
            185,071





Amortized
                Cost of SecuritiesDecember
                312007
            
            2006
            
            2005Securities
                Available For SaleU.S.
                Treasury
            
            $
            3,512
            
            $
            4,004
            
            $
            3,993U.S.
                Government sponsored entities
            
            
            69,954
            
            
            111,458
            
            
            69,888Mortgage-backed
                securities
            
            
            101,653
            
            
            86,525
            
            
            50,128Obligations
                of states and political subdivisions
            
            
            52,329
            
            
            50,938
            
            
            52,549Other
                securities
            
            
            9,127
            
            
            10,313
            
            
            9,684Total
                securities available for sale
            
            $
            236,575
            
            $
            263,238
            
            $
            186,242





**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
            
            $
            3,001
            
            
            3.83
            %
            $
            533
            
            
            4.60
            %
            $
            -
            
            
            -
            %
            $
            -
            
            
            -
            %
            $
            3,534
            
            
            3.95
            %U.S.
                Government sponsored entities
            
            
            63,466
            
            
            4.45
            
            
            6,701
            
            
            5.12
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            70,167
            
            
            4.51Mortgage-backed
                securities
            
            
            16,668
            
            
            5.14
            
            
            53,927
            
            
            5.05
            
            
            13,075
            
            
            5.66
            
            
            18,444
            
            
            5.47
            
            
            102,114
            
            
            5.22Obligations
                  of states andpolitical
                  subdivisions
            
            
            19,914
            
            
            6.71
            
            
            21,170
            
            
            6.02
            
            
            10,236
            
            
            6.12
            
            
            1,199
            
            
            6.31
            
            
            52,519
            
            
            6.31Other
                debt securities
            
            
            3,081
            
            
            6.40
            
            
            2,219
            
            
            4.24
            
            
            1,486
            
            
            5.52
            
            
            1,593
            
            
            6.88
            
            
            8,379
            
            
            5.76Total
                debt securities available for sale
            
            $
            106,130
            
            
            5.02
            %
            $
            84,550
            
            
            5.28
            %
            $
            24,797
            
            
            5.84
            %
            $
            21,236
            
            
            5.62
            %
            $
            236,713
            
            
            5.25
            %Equity
                securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            425$
            237,138




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.





8




FIRST
      M&F CORPORATION AND SUBSIDIARY





**Table
      5**





**COMPOSITION
      OF THE LOAN PORTFOLIO**





2007
            
            2006
            
            2005
            
            2004
            
            2003*(Dollars
                in*
            
            
            
            % Of
            
            
            
            % Of
            
            
            
            % Of
            
            
            
            % Of
            
            
            
            % Of*thousands)*
            
            Amount
            
            Total
            
            Amount
            
            Total
            
            Amount
            
            Total
            
            Amount
            
            Total
            
            Amount
            
            TotalHeld
                For InvestmentCommercial,
                financial and agricultural
            
            $
            169,447
            
            
            13.90
            %
            $
            150,905
            
            
            13.88
            %
            $
            151,598
            
            
            16.25
            %
            $
            128,735
            
            
            15.46
            %
            $
            109,558
            
            
            14.24
            %Non-residential
                real estate
            
            
            731,595
            
            
            59.99
            
            
            621,841
            
            
            57.19
            
            
            509,986
            
            
            54.65
            
            
            416,177
            
            
            49.99
            
            
            370,560
            
            
            48.18Residential
                real estate
            
            
            269,601
            
            
            22.11
            
            
            262,046
            
            
            24.10
            
            
            227,166
            
            
            24.35
            
            
            237,746
            
            
            28.56
            
            
            232,437
            
            
            30.22Consumer
                loans
            
            
            40,860
            
            
            3.35
            
            
            45,872
            
            
            4.22
            
            
            41,458
            
            
            4.44
            
            
            46,677
            
            
            5.61
            
            
            53,716
            
            
            6.98Other
                loans
            
            
            7,932
            
            
            0.65
            
            
            6,350
            
            
            0.59
            
            
            2,872
            
            
            0.31
            
            
            3,151
            
            
            0.38
            
            
            2,885
            
            
            0.38Lease
                financing
            
            
            -
            
            
            -
            
            
            269
            
            
            0.02
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                loans
            
            $
            1,219,435
            
            
            100.00
            %
            $
            1,087,283
            
            
            100.00
            %
            $
            933,080
            
            
            100.00
            %
            $
            832,486
            
            
            100.00
            %
            $
            769,156
            
            
            100.00
            %Loans
                held for sale
            
            $
            5,571
            
            
            
            
            $
            7,263
            
            
            
            
            $
            5,704
            
            
            
            
            $
            12,236
            
            
            
            
            $
            12,165





**Table
      6**





**LOAN
      MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
      RATES**





**Maturity
                distribution of loans at December 31, 2007**
            
            Within
            
            One to Five
            
            After Five*(Dollars
                in thousands)*
            
            One Year
            
            Years
            
            Years
            
            TotalCommercial,
                financial and agricultural
            
            $
            89,055
            
            $
            77,743
            
            $
            2,649
            
            $
            169,447Non-residential
                real estate
            
            
            305,435
            
            
            359,073
            
            
            67,087
            
            
            731,595Residential
                real estate
            
            
            72,020
            
            
            119,342
            
            
            78,239
            
            
            269,601Consumer
                loans
            
            
            13,699
            
            
            26,867
            
            
            294
            
            
            40,860Other
                loans
            
            
            2,572
            
            
            2,184
            
            
            3,176
            
            
            7,932Total
                loans
            
            $
            482,781
            
            $
            585,209
            
            $
            151,445
            
            $
            1,219,435




**Rate
                sensitivity of loans at December 31, 2007**
            
            One to Five
            
            After FiveYears
            
            Years
            
            TotalFixed
                rate loans
            
            $
            532,753
            
            $
            88,779
            
            $
            621,532Floating
                rate loans
            
            
            52,456
            
            
            62,666
            
            
            115,122Total
            
            $
            585,209
            
            $
            151,445
            
            $
            736,654





**Table
      7**





**NONPERFORMING
      ASSETS AND PAST DUE LOANS**





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003Nonaccrual
                loans
            
            $
            6,524
            
            $
            3,557
            
            $
            1,403
            
            $
            3,302
            
            $
            4,517Restructured
                loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming loans
            
            
            6,524
            
            
            3,557
            
            
            1,403
            
            
            3,302
            
            
            4,517Other
                real estate owned
            
            
            6,232
            
            
            3,135
            
            
            3,042
            
            
            3,314
            
            
            1,282Total
                nonperforming assets
            
            
            12,756
            
            
            6,692
            
            
            4,445
            
            
            6,616
            
            
            5,799Accruing
                loans past due 90 days or more
            
            
            1,093
            
            
            376
            
            
            510
            
            
            645
            
            
            1,531Total
                nonperforming assets and loans
            
            $
            13,849
            
            $
            7,068
            
            $
            4,955
            
            $
            7,261
            
            $
            7,330Interest
                income that would have been recorded on nonaccrual loans if they
                had been
                current and accruing
            
            $
            519Interest
                that was recorded in the financial statements for loans that were
                on
                nonaccrual status
            
            $
            38





9





FIRST
      M&F CORPORATION AND SUBSIDIARY





**Table
      8**





**ANALYSIS
      OF THE ALLOWANCE FOR LOAN LOSSES**





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003Balance
                at beginning of year
            
            $
            14,950
            
            $
            12,449
            
            $
            11,619
            
            $
            10,891
            
            $
            10,258Adjustment
                for purchase acquisition
            
            
            -
            
            
            2,234
            
            
            -
            
            
            -
            
            
            -Charge
                offs:Commercial,
                financial and agricultural
            
            
            (762
            )
            
            (767
            )
            
            (1,141
            )
            
            (3,832
            )
            
            (721
            )Real
                estate –
                nonresidential
            
            
            (1,223
            )
            
            (282
            )
            
            (182
            )
            
            (312
            )
            
            (318
            )Real
                estate – residential
            
            
            (1,581
            )
            
            (1,512
            )
            
            (464
            )
            
            (289
            )
            
            (1,120
            )Consumer
            
            
            (1,178
            )
            
            (1,264
            )
            
            (1,286
            )
            
            (1,193
            )
            
            (1,516
            )Total
            
            
            (4,744
            )
            
            (3,825
            )
            
            (3,073
            )
            
            (5,626
            )
            
            (3,675
            )Recoveries:Commercial,
                financial and agricultural
            
            
            373
            
            
            256
            
            
            101
            
            
            190
            
            
            85Real
                estate – nonresidential
            
            
            666
            
            
            228
            
            
            49
            
            
            24
            
            
            56Real
                estate – residential
            
            
            25
            
            
            102
            
            
            152
            
            
            445
            
            
            27Consumer
            
            
            427
            
            
            474
            
            
            455
            
            
            344
            
            
            338Total
            
            
            1,491
            
            
            1,060
            
            
            757
            
            
            1,003
            
            
            506Net
                charge-offs
            
            
            (3,253
            )
            
            (2,765
            )
            
            (2,316
            )
            
            (4,623
            )
            
            (3,169
            )Provision
                for loan losses
            
            
            2,520
            
            
            3,032
            
            
            3,146
            
            
            5,351
            
            
            3,802Balance
                at end of year
            
            $
            14,217
            
            $
            14,950
            
            $
            12,449
            
            $
            11,619
            
            $
            10,891Net
                Charge-Offs To Average Loans
            
            
            0.28
            %
            
            0.26
            %
            
            0.26
            %
            
            0.58
            %
            
            0.43
            %





**Table
      9**





**ALLOCATION
      OF ALLOWANCE FOR LOAN LOSSES**





December
                31*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003Commercial,
                financial and agricultural
            
            $
            6,953
            
            $
            7,540
            
            $
            5,642
            
            $
            5,224
            
            $
            4,833Non-residential
                real estate
            
            
            3,094
            
            
            3,095
            
            
            695
            
            
            574
            
            
            317Residential
                real estate
            
            
            1,936
            
            
            1,865
            
            
            1,351
            
            
            1,241
            
            
            330Consumer
                loans
            
            
            2,234
            
            
            2,450
            
            
            4,761
            
            
            4,580
            
            
            5,411Total
                loans
            
            $
            14,217
            
            $
            14,950
            
            $
            12,449
            
            $
            11,619
            
            $
            10,891





December
                31**Allowance
                As A Percentage Of Loan Type**
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003Commercial,
                financial and agricultural
            
            
            3.92
            %
            
            4.79
            %
            
            3.65
            %
            
            3.96
            %
            
            4.30
            %Non-residential
                real estate
            
            
            0.42
            
            
            0.50
            
            
            0.14
            
            
            0.14
            
            
            0.09Residential
                real estate
            
            
            0.72
            
            
            0.71
            
            
            0.59
            
            
            0.52
            
            
            0.14Consumer
                loans
            
            
            5.47
            
            
            5.34
            
            
            11.48
            
            
            9.81
            
            
            10.07Total
                loans
            
            
            1.17
            %
            
            1.37
            %
            
            1.33
            %
            
            1.40
            %
            
            1.42
            %





**Net
                Charge-Offs As A Percent Of Year End**
            
            December
                31**Loans
                Outstanding, By Type**
            
            2007
            
            2006
            
            2005
            
            2004
            
            2003Commercial,
                financial and agricultural
            
            
            0.22
            %
            
            0.32
            %
            
            0.67
            %
            
            2.76
            %
            
            0.57
            %Non-residential
                real estate
            
            
            0.08
            
            
            0.01
            
            
            0.03
            
            
            0.07
            
            
            0.07Residential
                real estate
            
            
            0.58
            
            
            0.54
            
            
            0.14
            
            
            (0.07
            )
            
            0.47Consumer
                loans
            
            
            1.84
            
            
            1.72
            
            
            2.00
            
            
            1.82
            
            
            2.19Total
                loans
            
            
            0.27
            %
            
            0.25
            %
            
            0.25
            %
            
            0.56
            %
            
            0.41
            %





**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, 2007 ( *dollars
      in thousands* ):





Three
                months or less
            
            $
            78,694Over
                three months through six months
            
            
            100,740Over
                six months through twelve months
            
            
            79,704Over
                one year
            
            
            30,395Total
            
            $
            289,533





10





FIRST
      M&F CORPORATION AND SUBSIDIARY





**Table
      11**





**SELECTED
      RATIOS**





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





2007
            
            2006
            
            2005Return
                on average assets
            
            
            0.92
            %
            
            0.94
            %
            
            1.04
            %Return
                on average equity
            
            
            10.78
            
            
            11.39
            
            
            10.88Dividend
                payout ratio
            
            
            32.50
            
            
            33.77
            
            
            36.79Average
                equity to assets ratio
            
            
            8.52
            
            
            8.25
            
            
            9.57




**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)***Securities
                sold under agreements to repurchase**
            
            2007
            
            2006
            
            2005Outstanding
                at end of period
            
            $
            9,676
            
            $
            6,712
            
            $
            18,062Maximum
                outstanding at any month-end during the period
            
            
            9,676
            
            
            10,062
            
            
            18,062Average
                outstanding during the period
            
            
            6,154
            
            
            6,205
            
            
            14,875Interest
                paid
            
            
            273
            
            
            280
            
            
            619Weighted
                average rate during each period
            
            
            4.44
            %
            
            4.51
            %
            
            4.16
            %**Federal
                funds purchased**Outstanding
                at end of period
            
            $
            -
            
            $
            12,900
            
            $
            -Maximum
                outstanding at any month-end during the period
            
            
            20,000
            
            
            25,000
            
            
            17,400Average
                outstanding during the period
            
            
            6,291
            
            
            2,582
            
            
            4,181Interest
                paid
            
            
            336
            
            
            137
            
            
            157Weighted
                average rate during each period
            
            
            5.34
            %
            
            5.31
            %
            
            3.77
            %





**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.*





·
            An
                economic slowdown could reduce loan originations and fee income volumes
                below expectations, could slow the pace ofloan
                payments or could cause deposits to
                decrease.





·
            If
                the economy deteriorated and real estate values became depressed,
                the
                approximately 82% of the Company’s loan portfolio that issecured
                by real estate could come under stress, thus possibly requiring additional
                loan loss accruals.





·
            Adverse
                changes in local real estate markets may affect the Company’s ability to
                dispose of its foreclosed real estate at prices above theproperties’
                carrying values, thus causing additional
                losses.





·
            Adverse
                price changes or liquidity problems in the bond markets could reduce
                the
                values of the Company’s assets as well asimpede
                its ability to raise cash through security sales or additional
                borrowings.




*General
      economic conditions may adversely affect our customers’ ability to meet their
      obligations.*





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





*The
      Company is subject to interest rate risk.*





·
            A
                much steeper than anticipated increase in interest rates or a steep
                decline in those rates over a short period of time couldcause
                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 adecrease
                in stockholders’ equity. A decrease in interest rates will increase the
                value of liabilities, resulting in decreases instockholders’
                equity.





11





FIRST
      M&F CORPORATION AND SUBSIDIARY





*Certain
      changes in interest rates, inflation, 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 propertytaxes
                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 cashflows,
                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 theinsurance
                agencies. Such claims may also affect the availability of insurance
                products for certain classes of customers, thereby
                reducingcommission
                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 itsproducts
                profitably.





*The
      Company may terminate its pension plan within the next ten
      years.*





·
            Investments
                in the portfolio of the Company’s pension plan may not provide adequate
                returns to fund plan termination obligations, thuscausing
                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 NASDAQGlobal
                Select Market to raise equity capital. If the market should fail
                to
                operate, the Company may be severely constrained in raising
                capital.





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





*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 DepositInsurance
                Corporation, the Mississippi Department of Banking and Consumer Finance,
                and the Mississippi Department of Insurance. Newregulations
                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 inthese
                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 theCompany,
                or that require extraordinary efforts and additional costs to
                implement.





12





FIRST
      M&F CORPORATION AND SUBSIDIARY





*The
      Company engages in acquisitions of other businesses.*





·
            The
                Company considers acquisitions of other banks and other types of
                related
                businesses as opportunities arise. The Company must raisecapital
                for any future acquisitions. If the Company’s stock price is unattractive,
                then the Company may not be able to enter into a shareexchange
                or will have to do so at a disadvantageous exchange ratio. This could
                cause undesirable dilution to the existing shareholders. Ifthe
                Company finances acquisitions with cash, then the acquired company
                will
                need to produce sufficient cash flows to repay the debtincurred.
                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. Legalcontingencies,
                related to the acquired companies, beyond those that the Company
                is aware
                of could arise, causing unexpected
                costs.




**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 41 of its branch facilities and leases ten
      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. It is anticipated that all leases will be
      renewed.





**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.





**SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a shareholder vote during the fourth quarter of 2007.





13




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, 2007, there were 1,221 shareholders of record of the Company's
      common stock. On December 31, 2007, the Company's stock closed at $15.80 per
      share.





The
      following table summarizes the trading ranges and dividend payouts for the
      two
      years ended December 31, 2007:





**Quarterly
      Closing Common Stock**


**Price
      Ranges and Dividends Paid**





First
            
            Second
            
            Third
            
            Fourth2007:High
            
            $
            19.99
            
            $
            19.81
            
            $
            19.00
            
            $
            17.91Low
            
            
            18.07
            
            
            17.85
            
            
            17.10
            
            
            15.28Close
            
            
            18.40
            
            
            18.63
            
            
            17.55
            
            
            15.80Dividend
            
            
            .13
            
            
            .13
            
            
            .13
            
            
            .132006:High
            
            $
            18.00
            
            $
            21.53
            
            $
            20.75
            
            $
            19.75Low
            
            
            17.00
            
            
            17.31
            
            
            17.52
            
            
            17.60Close
            
            
            17.40
            
            
            19.76
            
            
            18.28
            
            
            19.59Dividend
            
            
            .13
            
            
            .13
            
            
            .13
            
            
            .13




The
      following table summarizes stock and dividend performance ratios for the five
      years ended December 31, 2007:





**Stock
      and Dividend Performance**





2007
            
            2006
            
            2005
            
            2004
            
            2003Price/earnings
                ratio
            
            
            9.88
            x
            
            12.72
            x
            
            12.04
            x
            
            14.28
            x
            
            16.06
            xPrice/book
                value ratio
            
            
            1.02
            x
            
            1.38
            x
            
            1.29
            x
            
            1.36
            x
            
            1.56
            xBook
                value/share
            
            $
            15.45
            
            $
            14.15
            
            $
            13.06
            
            $
            12.48
            
            $
            12.12Dividend
                payout ratio
            
            
            32.50
            %
            
            33.77
            %
            
            36.79
            %
            
            42.19
            %
            
            42.37
            %Historical
                dividend yield
            
            
            2.65
            %
            
            3.08
            %
            
            3.04
            %
            
            2.64
            %
            
            3.60
            %




On
      May
      11, 2005 the Board authorized a program to repurchase up to 10,000 shares of
      common stock per month in the open market over a twelve month period beginning
      on May 15, 2005 and ending on May 14, 2006.





The
      Company did not repurchase any shares during 2006 and the Board did not extend
      the repurchase program that expired on May 14, 2006.





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.





14




FIRST
      M&F CORPORATION AND SUBSIDIARY





The
      following table provides information regarding securities issued under our
      equity compensation plans that were in effect during 2007:





Number of
                    Securities
                    to be issued 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
                StockOption
                Plan
            
            
            123,500
            
            $
            16.04
            
            
            -2005
                Equity Incentive Plan
            
            
            5,000
            
            
            19.03
            
            
            569,984Equity
                compensation plans not approved by security holders
            
            
            None
            
            
            -
            
            
            -
            
            
            -Total
            
            
            
            
            
            128,500
            
            $
            16.16
            
            
            569,984





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




In
      2007,
      under the 2005 Equity Incentive Plan, the Company issued to senior officers
      13,250 shares of restricted stock that vest in seven years at a weighted average
      fair value at the date of grant of $15.48. Also in 2007, there were forfeitures
      of 6,000 shares and vestings of 1,500 shares of restricted stock. Also in 2007,
      under the 2005 Equity Incentive Plan, the Company issued 2,000 shares of stock
      options to directors with a grant date strike price of $19.00, which was the
      grant date fair value of the underlying stock.





**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 2002.




First M


*
        $100
        invested on 12/31/02 in stock or index-including reinvestment of dividends.
        Fiscal year ending December 31.


12/02
            
            12/03
            
            12/04
            
            12/05
            
            12/06
            
            12/07First
                M&F Corporation
            
            
            100.00
            
            
            140.50
            
            
            129.35
            
            
            132.71
            
            
            158.68
            
            
            131.82NASDAQ
                Composite
            
            
            100.00
            
            
            149.75
            
            
            164.64
            
            
            168.60
            
            
            187.83
            
            
            205.22NASDAQ
                Bank
            
            
            100.00
            
            
            130.51
            
            
            144.96
            
            
            141.92
            
            
            159.42
            
            
            125.80





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





15





FIRST
      M&F CORPORATION AND SUBSIDIARY





**SELECTED
      FINANCIAL DATA**





*(Thousands,
                except per share data)*2007
            
            2006
            
            2005
            
            2004
            
            2003EARNINGSInterest
                income
            
            $
            101,916
            
            $
            91,505
            
            $
            67,534
            
            $
            58,232
            
            $
            58,091Interest
                expense
            
            
            47,876
            
            
            39,156
            
            
            23,184
            
            
            17,050
            
            
            17,857Net
                interest income
            
            
            54,040
            
            
            52,349
            
            
            44,350
            
            
            41,182
            
            
            40,234Provision
                for loan losses
            
            
            2,520
            
            
            3,032
            
            
            3,146
            
            
            5,351
            
            
            3,802Noninterest
                income
            
            
            21,052
            
            
            19,853
            
            
            16,539
            
            
            15,226
            
            
            14,184Noninterest
                expense
            
            
            51,105
            
            
            48,631
            
            
            39,141
            
            
            36,994
            
            
            34,732Income
                taxes
            
            
            6,988
            
            
            6,604
            
            
            6,004
            
            
            4,075
            
            
            4,748Noncontrolling
                interests
            
            
            21
            
            
            10
            
            
            6
            
            
            (787
            )
            
            244Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592
            
            $
            10,775
            
            $
            10,892Net
                interest income, taxable equivalent
            
            $
            55,277
            
            $
            53,616
            
            $
            45,632
            
            $
            42,586
            
            $
            41,747Cash
                dividends paid
            
            $
            4,772
            
            $
            4,751
            
            $
            4,648
            
            $
            4,535
            
            $
            4,604PER
                COMMON SHARENet
                income (basic)
            
            $
            1.60
            
            $
            1.54
            
            $
            1.40
            
            $
            1.19
            
            $
            1.18Cash
                dividends paid
            
            
            .52
            
            
            .52
            
            
            .52
            
            
            .50
            
            
            .50Book
                value
            
            
            15.45
            
            
            14.15
            
            
            13.06
            
            
            12.48
            
            
            12.12Closing
                stock price
            
            
            15.80
            
            
            19.59
            
            
            16.86
            
            
            16.93
            
            
            18.95SELECTED
                AVERAGE BALANCESAssets
            
            $
            1,573,630
            
            $
            1,482,013
            
            $
            1,209,054
            
            $
            1,110,189
            
            $
            1,061,937Earning
                assets, amortized cost
            
            
            1,407,559
            
            
            1,321,730
            
            
            1,093,782
            
            
            1,005,927
            
            
            963,903Loans
                held for investment
            
            
            1,148,275
            
            
            1,056,899
            
            
            884,232
            
            
            794,010
            
            
            720,955Investments,
                amortized cost
            
            
            243,042
            
            
            237,578
            
            
            190,067
            
            
            184,605
            
            
            207,427Total
                deposits
            
            
            1,208,007
            
            
            1,153,381
            
            
            949,228
            
            
            850,140
            
            
            835,370Equity
            
            
            134,083
            
            
            122,288
            
            
            115,723
            
            
            111,995
            
            
            110,908SELECTED
                YEAR-END BALANCESAssets
            
            $
            1,653,751
            
            $
            1,540,275
            
            $
            1,267,118
            
            $
            1,142,712
            
            $
            1,078,298Earning
                assets, carrying value
            
            
            1,467,624
            
            
            1,360,064
            
            
            1,128,101
            
            
            1,027,056
            
            
            970,388Loans
                held for investment
            
            
            1,219,435
            
            
            1,087,283
            
            
            933,080
            
            
            832,486
            
            
            769,156Investments,
                carrying value
            
            
            237,138
            
            
            261,828
            
            
            185,071
            
            
            175,654
            
            
            187,577Total
                deposits
            
            
            1,262,455
            
            
            1,185,982
            
            
            973,671
            
            
            877,264
            
            
            820,226Equity
            
            
            140,080
            
            
            128,047
            
            
            117,377
            
            
            112,468
            
            
            110,679SELECTED
                RATIOSReturn
                on average assets
            
            
            0.92
            %
            
            0.94
            %
            
            1.04
            %
            
            0.97
            %
            
            1.03
            %Return
                on average equity
            
            
            10.78
            
            
            11.39
            
            
            10.88
            
            
            9.62
            
            
            9.82Average
                equity to average assets
            
            
            8.52
            
            
            8.25
            
            
            9.57
            
            
            10.09
            
            
            10.44Dividend
                payout ratio
            
            
            32.50
            
            
            33.77
            
            
            36.79
            
            
            42.19
            
            
            42.37Price
                to earnings (x)
            
            
            9.88x
            
            
            12.72x
            
            
            12.04x
            
            
            14.28x
            
            
            16.06xPrice
                to book (x)
            
            
            1.02
            
            
            1.38
            
            
            1.29
            
            
            1.36
            
            
            1.56





16




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**





Net
      income for 2007 was $14.458 million, or $1.60 basic and $1.59 diluted per share
      as compared to $13.925 million, or $1.54 basic and $1.53 diluted per share
      in
      2006 and $12.592 million, or $1.40 basic and diluted per share in 2005. Major
      factors contributing to the increased earnings were


(1)
      strong loan growth in the metropolitan areas surrounding Memphis, Tennessee,
      Birmingham, Alabama and Crestview, Florida, (2) continued sound asset quality
      that resulted in .28% and .26% in net charge-offs as a percentage of average
      loans for 2007 and 2006 and (3) consistent noninterest revenue growth from
      2005
      through 2007 in deposit revenues, mortgage revenues and agency
      commissions.





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
      the
      first quarter of 2006 the Company closed its acquisition of Columbiana
      Bancshares, adding six locations in central Alabama. In April the Company opened
      a full-service branch in Madison, Mississippi. In May the Company completed
      its
      acquisition of Crockett County Bancshares. Subsequent to the acquisition, the
      Company converted its loan production office in Germantown, Tennessee, to a
      full-service bank, as well as opened two additional banking offices in the
      Memphis metropolitan area. In November the Company acquired a Florida banking
      charter and opened a full-service bank in Crestview, Florida.





In
      the
      third quarter of 2005 the Company completed construction of a branch facility
      in
      Southaven. The Company also substantially completed a financial service office
      complex in Madison which was opened in April of 2006. The building houses a
      branch facility as well as several fee-generating businesses.





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.





During
      the third quarter of 2006, the Company began clearing items with the Federal
      Reserve through check image exchange, which allows images of checks to be
      processed rather than handling the actual checks. During 2006, the Company
      developed technology to allow the emailing of bank statements to customers.





During
      the third and fourth quarters of 2005, the Company restructured its item
      processing technology by converting from a traditional proof environment to
      an
      image proof-of-deposit environment. The new system is designed to capture images
      of items rather than the items having to go through the traditional encoding
      process. This environment minimizes the handling of paper documents, lowers
      labor costs, automates internal processes and improves the Company’s
      preparedness for future industry migration toward full check image
      exchange.





Total
      assets increased by 7.37% in 2007, ending the year at $1.654 billion. Total
      assets increased by 21.56% in 2006, ending the year at $1.540 billion. Total
      assets increased by 10.89% in 2005 to end the year at $1.267 billion. The
      compounded annual growth rate for total assets for the last five (5) years
      was
      9.78%, while the compounded growth rate for deposits was 8.91%.





17




FIRST
      M&F CORPORATION AND SUBSIDIARY





**RESULTS
      OF OPERATIONS**





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





2007
            
            2006
            
            2005Net
                interest margin
            
            
            3.93
            %
            
            4.06
            %
            
            4.17
            %Efficiency
                ratio
            
            
            66.95
            
            
            66.19
            
            
            62.96Return
                on assets
            
            
            0.92
            
            
            0.94
            
            
            1.04Return
                on equity
            
            
            10.78
            
            
            11.39
            
            
            10.88Noninterest
                income to avg. assets
            
            
            1.34
            
            
            1.34
            
            
            1.37Noninterest
                  incometo
                  revenues (1)
            
            
            27.58
            
            
            27.02
            
            
            26.60Noninterest
                expense to avg. assets
            
            
            3.25
            
            
            3.28
            
            
            3.24Salaries
                  and benefits to totalnoninterest
                  expense
            
            
            57.43
            
            
            56.73
            
            
            58.09Contribution
                margin (2)
            
            
            61.55
            
            
            62.45
            
            
            63.43Nonperforming
                loans to loans
            
            
            0.62
            
            
            0.36
            
            
            0.20Net
                charge-offs as a percent of average loans
            
            
            0.28
            
            
            0.26
            
            
            0.26




(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*)
            
            2007
            
            2006
            
            2005Mortgage
                originations
            
            $
            73,202
            
            $
            69,258
            
            $
            57,691Commissions
                from annuity sales
            
            
            125
            
            
            153
            
            
            324Trust
                and retail investment revenues
            
            
            598
            
            
            616
            
            
            484Revenues
                per FTE employee
            
            
            136
            
            
            134
            
            
            133Agency
                  commissions per agencyFTE
                  employee (1)
            
            
            97
            
            
            87
            
            
            79





(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 2007 was $54.040 million as
      compared to $52.349 million for 2006. For 2007 compared to 2006: earning asset
      yields increased by 31 basis points, liability costs increased by 48 basis
      points, the net interest spread decreased by 17 basis points and the net
      interest margin decreased by 13 basis points.





Net
      interest income before loan loss expenses for 2006 was $52.349 million as
      compared to $44.350 million for 2005. For 2006 compared to 2005: earning asset
      yields increased by 73 basis points, liability costs increased by 91 basis
      points, the net interest spread decreased by 18 basis points and the net
      interest margin decreased by 11 basis points.





Balance
      sheet dynamics affecting the comparative net interest margins for 2007 compared
      to 2006 include (1) growth of 8.65% in average loans held for investment, (2)
      an
      increase in average loans as a percentage of earning assets from 79.96% in
      2006
      to 81.58% in 2007, (3) an increase in average certificates of deposits of
      12.66%, (4) an increase in average other borrowings of 12.04% and (5) a decrease
      in average noninterest-bearing deposits as a percentage of total assets from
      12.46% in 2006 to 11.60% in 2007.





Balance
      sheet dynamics affecting the comparative net interest margins for 2006 compared
      to 2005 include (1) growth of 19.53% in average loans held for investment,
      (2) a
      decrease in average loans as a percentage of earning assets from 80.84% in
      2005
      to 79.96% in 2006, (3) an increase in average certificates of deposits of
      34.92%, (4) an increase in average other borrowings of 59.12% and (5) an
      increase in average noninterest-bearing deposits as a percentage of total assets
      from 11.58% in 2005 to 12.46% in 2006.





Yield
      and
      cost dynamics affecting the comparative net interest margins for 2007 compared
      to 2006 include (1) an increase of 29 basis points in yields on loans held
      for
      investment and for sale, (2) an increase of 17 basis points in investment and
      short-term funds yields, (3) an increase of 51 basis points in costs of deposits
      and (4) an increase of 20 basis points in costs of borrowings.





Yield
      and
      cost dynamics affecting the comparative net interest margins for 2006 compared
      to 2005 include (1) an increase of 87 basis points in yields on loans held
      for
      investment and for sale, (2) an increase of 27 basis points in investment and
      short-term funds yields, (3) an increase of 87 basis points in costs of deposits
      and (4) an increase of 87 basis points in costs of borrowings.





18




FIRST
      M&F CORPORATION AND SUBSIDIARY





The
      primary driver of the net interest margin trend in 2007 was the steady increase
      in deposit costs. A primary factor in the loan rate trend from 2005 through
      2007
      was the steady increase in the prime rate through June 2006. Short-term Treasury
      rates increased by 175 basis points during 2005 and increased by another 95
      basis points by June 2006. Short-term Treasury rates hit their three-year peak
      in February 2007 and fell by 190 basis points in 2007 with 167 basis points
      of
      the decline occurring during the second half.





The
      following table shows the relative sensitivity of the Company’s yields and costs
      to leading changes in market rates:





2004 to 2005
            
            2005 to 2006
            
            2006 to 2007Net Change (Basis Points)
            
            Net Change (Basis Points)
            
            Net Change (Basis Points)Loan
                yields
            
            
            39
            
            
            87
            
            
            29Earning
                asset yields
            
            
            36
            
            
            73
            
            
            31Deposit
                costs
            
            
            57
            
            
            87
            
            
            51Net
                interest margin
            
            
            (6
            )
            
            (11
            )
            
            (13
            )3-month
                Treasury (a)
            
            
            129
            
            
            190
            
            
            84Prime
                rate (b)
            
            
            118
            
            
            200
            
            
            107FHLB
                borrowing costs (c)
            
            
            154
            
            
            174
            
            
            59Loan
                yields to 3-month Treasury
            
            
            30.23
            %
            
            45.79
            %
            
            34.52
            %Loan
                yields to Prime rate
            
            
            33.05
            %
            
            43.50
            %
            
            27.10
            %Loan
                yields to FHLB costs
            
            
            25.32
            %
            
            50.00
            %
            
            49.15
            %Deposit
                costs to 3-month Treasury
            
            
            44.19
            %
            
            45.79
            %
            
            60.71
            %





(a)
      3-month Treasury yield averages are calculated from July of the previous year
      through June of the current year


(b)
      Prime
      rate averages are calculated from July of the previous year through June of
      the
      current year


(c)
      FHLB
      borrowing costs are averages of the 1-year cost calculated from July of the
      previous year to June of the current year


Note:
      one
      basis point equals .01%





Over
      the
      last three years loan yields have become more sensitive to FHLB borrowing cost
      trends while deposit costs have become more sensitive to short-term Treasury
      rates. Another factor influencing loan yields and deposit costs has been the
      changing shape of the yield curve. The difference between 5-year Treasury rates
      and 3-month Treasury rates became negative in July 2006. This inversion
      steepened from 4 basis points in July 2006 to a high of 60 basis points in
      March
      2007. This change in the yield curve put downward pressure on asset yields
      while
      putting upward pressure on deposit costs. The yield curve inversion ended during
      the third quarter of 2007, with the 3-month to 5-year spread ending the year
      at
      42 basis points. Another factor that influenced loan pricing from 2005 through
      2007 was the change in credit spreads. The spread between the AAA corporate
      rates and the 3-month Treasury rates dropped below 100 basis points in January
      2006 and hit their three-year nadir in March 2007. However, due to subprime
      and
      liquidity factors affecting the market, these credit spreads have improved
      by
      137 basis points since June 2007 to end the year at 242 basis
      points.





Management
      expects that the Federal Reserve will continue to drop its Fed funds target
      rate
      until economic indicators show improvements in the economy. Therefore, two
      challenges for 2008 will be (1) to maintain loan yields in a falling-rate
      environment and (2) to take advantage of the rate decreases in the pricing
      of
      deposits while maintaining deposit growth. The wider credit market spreads,
      combined with a normally-shaped yield curve, should cushion loan yields somewhat
      from the general downward trend in market rates. However, intense competition
      for loans, should it occur, could moderate the Company’s loan pricing. It is
      possible that FHLB borrowing rates will fall below time deposit rates, in which
      case Management may use FHLB borrowings as an alternative to deposits to fund
      loan growth. However, the Company’s strategy is to use a restructured set of
      core deposit products that offer add-ons and incentives to attract funding.
      These deposit products should be less costly than borrowings. The Company will
      still use certificate of deposit specials, primarily with short maturities,
      to
      provide funding when necessary. Certificate specials and other deposit
      promotions are preferred over borrowings because of their cross-selling
      potential.




**Provision
      for Loan Losses**





During
      2007 the Company ’ s
      provision decreased to $2.520 million after decreasing to $3.032 million in
      2006
      from $3.146 million in 2005. The reduction in accruals were the result of (1)
      improved loss trends as the ratio of net charge-offs to average loans were
      .28%
      in 2007 and .26% in 2006 and 2005 and (2) improved trends in impaired loans
      and
      other nonperforming loans that are inputs into the calculations of the estimated
      allowance necessary at each period. The strategy of the Company is to maintain
      credit quality at levels that limit net charge-off percentages to no more than
      .30% to .35%. The percentage of allowance for loan loss to total loans held
      for
      investment was 1.17% at December 31, 2007, 1.37% at December 31, 2006, and
      1.33%
      at December 31, 2005.





**Noninterest
      Income**





The
      movement over time of checking account customers into free checking accounts
      has
      dampened the influence of services charges on total deposit revenues. The
      increase in debit cards outstanding and in debit card transactions has been
      a
      strategic focus of the Company since 2004. 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 21.7% in 2007, by 38.8% in 2006 and
      by
      45.3% in 2005. Overdraft revenues improved in 2006 due to volumes related to
      the
      acquisition of Columbiana Bancshares and also to increases in pricing. The
      charge per item processed for overdrawn accounts increased by 12.00% in May
      2005
      and by 7.14% in October 2006. Numbers of items charged increased by 15.39%
      in
      2006 and decreased by .83% in 2007.




19





FIRST
      M&F CORPORATION AND SUBSIDIARY





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





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Service
                charge revenues
            
            $
            1,413
            
            $
            1,497
            
            $
            1,308Debit/ATM
                card revenues
            
            
            1,855
            
            
            1,534
            
            
            1,088Overdraft
                fee revenues
            
            
            7,694
            
            
            7,367
            
            
            6,079Service
                charges on deposit accounts
            
            $
            10,962
            
            $
            10,398
            
            $
            8,475





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. Overdrafts are considered loans and
      therefore are subject to the Company’s credit 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 may increase in 2008 due to the
      overdraft limit increases during 2007. Changes in the economy may influence
      customer habits relative to overdraft activity, making overdraft item volumes
      hard to predict.





The
      presence of mortgage originators in economically strong markets such as DeSoto,
      Rankin and Lee counties in Mississippi, the Birmingham, Alabama market and
      the
      Memphis, Tennessee market helped to improve origination volumes during 2007.
      Mortgage rates increased by 51 basis points during the second quarter of 2007
      and subsequently fell by 25 basis points during the third quarter, most of
      which
      occurred in September. Mortgage rates continued to decline from the end of
      the
      third quarter of 2007 to end the year 25 basis points lower. After spiking
      during the summer months of 2006, mortgage rates fell significantly to end
      2006
      at 4 basis points lower than at the end of 2005. During 2006 mortgage
      originations followed the typical trend of decreasing while rates moved up
      and
      increasing when rates moved down. However, 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. Additions to the originations staff were the primary
      factor in the improved originations and mortgage revenues for 2007 while the
      favorable interest rate move and additional staffing resulted in the 2006
      increase in mortgage income.





Management
      expects the staff additions from 2007, primarily in metropolitan markets, to
      positively influence originations during 2008. The Federal Reserve’s interest
      rate reduction strategies, if carried out into 2008, should provide a positive
      rate environment for mortgage originations and refinancing
      activity.





Agency
      commissions continued to grow from 2005 through 2007 as the Company continued
      its efforts to place insurance agents in branch locations and to build
      relationships with the Bank’s retail and commercial sales associates. Annuity
      commissions decreased by 18.06% in 2007, decreased by 52.79% in 2006 and
      decreased by 19.13% in 2005. Property, casualty, life and health commissions
      increased by 5.92% in 2007, increased by 5.51% in 2006 and increased by 3.31%
      in
      2005.





Management
      expects improvements in insurance revenues in 2008 with a renewed focus on
      joint
      sales efforts between the Bank and the insurance agents. Referral goals have
      been set for branch teams which should improve cross-selling efforts across
      the
      branch and agency businesses.




Significant
      components of other income for 2005 through 2007 are contained in the following
      table:





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Agency
                profit-sharing revenues
            
            $
            302
            
            $
            114
            
            $
            471Loan
                fees
            
            
            519
            
            
            445
            
            
            439Gains
                (losses) on foreclosed property sales
            
            
            (278
            )
            
            (513
            )
            
            (614
            )Gains
                on student loan sales
            
            
            300
            
            
            308
            
            
            231Gains
                on sale of nonmarketable equity securities
            
            
            -
            
            
            342
            
            
            -Rental
                revenues on foreclosed properties
            
            
            10
            
            
            59
            
            
            106Insurance
                claim for legal settlements
            
            
            370
            
            
            -
            
            
            -Timber
                sale revenues
            
            
            -
            
            
            117
            
            
            -Fee
                received from PULSE purchase of Discover Financial
                Services
            
            
            -
            
            
            -
            
            
            128All
                other income
            
            
            2,104
            
            
            2,168
            
            
            1,684Other
                income
            
            $
            3,327
            
            $
            3,040
            
            $
            2,445




20





FIRST
      M&F CORPORATION AND SUBSIDIARY





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.





**Noninterest
      Expense**





Salary
      and benefits expenses increased in 2007 with average full-time equivalent
      employees increasing from 549 in 2006 to 562 in 2007. 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
      freeze resulted in a reduction of 13 full-time equivalent employees in the
      branch system. However, 15 full-time equivalent employees were added in
      higher-paying positions in new branch locations, mortgage banking and other
      retail and commercial sales positions. The number of full-time equivalent
      employees in Alabama was reduced by 8 in 2007.





The
      number of full-time equivalent employees was 564 at the end of 2007, 570 at
      the
      end of 2006 and 472 at the end of 2005.





Of
      the
      2006 increases in full-time equivalent employees, 59 were added with the
      Columbiana Bancshares acquisition and 13 were added in the Crockett County
      Bancshares acquisition. New branch locations and new services required additions
      of full-time equivalent employees of 21 in 2006 and 14 in 2005. The mortgage
      department increased the number of originators in 2006 as it expanded its number
      of locations. The mortgage department reduced staffing in 2005 to match
      decreasing volumes.





The
      Company may add producers as it expands in current markets and moves into future
      new markets and businesses. However, the Company also expects that the
      contributions to earnings made by any additional personnel will increase as
      the
      new associates produce earning assets and fee revenues.





Health
      care related costs decreased by 26.83% in 2007 and increased by 10.42% in 2006
      after increasing by 17.47% in 2005. The 2007 reduction was primarily the result
      of lower insurance claims experience. The 2005 and 2006 expense reflects
      primarily the increasing cost of health care as well as the increasing number
      of
      employees covered by the plan.





Occupancy,
      equipment and telecommunications expenses increased in 2006 due to the Alabama
      and Tennessee acquisitions. During 2007 occupancy and equipment expenses
      increased due to the addition of four new locations in 2007. Another factor
      in
      the occupancy and equipment expense increases is that during 2006 and 2007
      eight
      new locations were added, five of which were leased. Rent expenses represented
      30% of the dollar increase in occupancy and equipment expenses for
      2007.





The
      marketing and business development expense increases in 2007 were primarily
      driven by several campaigns as the Company used more external advertising.
      An
      image campaign was introduced in 2007, running for most of the year, in addition
      to product promotions and the Company’s traditional Autumn Gridiron
      promotion.





Legal
      expenses, which are included in other expenses, were reduced by $365 thousand
      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.





Intangible
      asset amortization increased during 2007 and 2006 due to the amortization of
      core deposits acquired in the Columbiana Bancshares and Crockett County
      Bancshares acquisitions.





There
      was
      no impairment recognized as a result of the goodwill impairment tests performed
      by the Company in 2005 through 2007. The Company is required to test its
      goodwill intangible asset annually for impairment. No impairments were
      recognized for indefinite-lived intangible assets that were tested in
      2007.





**Income
      Taxes**





The
      Company’ s
      effective tax rate was 32.55% in 2007 as compared to 32.15% in 2006 and 32.28%
      in 2005. The 2007 increase was consistent with the increase in pre-tax earnings
      while municipal investment income decreased. The 2006 decrease was due primarily
      to the effect of tax credits. 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 $1.025 million in net operating
      losses and $198 thousand in affordable housing tax credits carried over from
      the
      Columbiana Bancshares acquisition during 2007.





The
      Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109” as of January 31,
      2007 with no material effect. The Company had no recognized uncertain tax
      positions as of December 31, 2007 and therefore did not have any tax accruals
      in
      2007 related to uncertain positions.





21





FIRST
      M&F CORPORATION AND SUBSIDIARY





**Quarterly
      Financial Trends**





The
      following table summarizes components of the Company’s statements of income by
      quarter for 2007 and 2006:


2007
                
                4thQtr 07First
                
                Second
                
                Third
                
                Fourth
                
                Vs*(Dollars
                    in thousands)*
                
                Quarter
                
                Quarter
                
                Quarter
                
                Quarter
                
                4thQtr 06Interest
                    income
                
                $
                24,332
                
                $
                25,125
                
                $
                26,045
                
                $
                26,414
                
                
                8.10
                %Interest
                    expense
                
                
                11,325
                
                
                11,603
                
                
                12,259
                
                
                12,689
                
                
                14.19Net
                    interest income
                
                
                13,007
                
                
                13,522
                
                
                13,786
                
                
                13,725
                
                
                3.03Provision
                    for loan losses
                
                
                630
                
                
                630
                
                
                630
                
                
                630
                
                
                420.66Noninterest
                    income
                
                
                5,557
                
                
                4,861
                
                
                5,425
                
                
                5,209
                
                
                (.55
                )Noninterest
                    expense
                
                
                12,682
                
                
                12,509
                
                
                12,889
                
                
                13,025
                
                
                .94Income
                    taxes
                
                
                1,691
                
                
                1,702
                
                
                1,879
                
                
                1,716
                
                
                (4.45
                )Noncontrolling
                    interest
                
                
                7
                
                
                7
                
                
                5
                
                
                2
                
                
                -Net
                    income
                
                $
                3,554
                
                $
                3,535
                
                $
                3,808
                
                $
                3,561
                
                
                (4.76
                %)Per
                    common share:Net
                    income (basic)
                
                $
                .39
                
                $
                .39
                
                $
                .42
                
                $
                .40
                
                
                (2.44
                %)Net
                    income (diluted)
                
                $
                .39
                
                $
                .39
                
                $
                .42
                
                $
                .39
                
                
                (4.88
                %)Cash
                    dividends
                
                
                .13
                
                
                .13
                
                
                .13
                
                
                .13
                
                
                -




2006
              
              4thQtr 06First
              
              Second
              
              Third
              
              Fourth
              
              Vs*(Dollars
                  in thousands)*
              
              Quarter
              
              Quarter
              
              Quarter
              
              Quarter
              
              4thQtr 05Interest
                  income
              
              $
              20,405
              
              $
              22,912
              
              $
              23,754
              
              $
              24,434
              
              
              32.52
              %Interest
                  expense
              
              
              7,956
              
              
              9,672
              
              
              10,416
              
              
              11,112
              
              
              65.59Net
                  interest income
              
              
              12,449
              
              
              13,240
              
              
              13,338
              
              
              13,322
              
              
              13.59Provision
                  for loan losses
              
              
              953
              
              
              1,004
              
              
              954
              
              
              121
              
              
              (82.46
              )Noninterest
                  income
              
              
              4,345
              
              
              4,858
              
              
              5,412
              
              
              5,238
              
              
              35.63Noninterest
                  expense
              
              
              10,993
              
              
              12,340
              
              
              12,394
              
              
              12,904
              
              
              24.44Income
                  taxes
              
              
              1,572
              
              
              1,502
              
              
              1,734
              
              
              1,796
              
              
              22.59Noncontrolling
                  interest
              
              
              6
              
              
              1
              
              
              3
              
              
              -
              
              
              -Net
                  income
              
              $
              3,270
              
              $
              3,251
              
              $
              3,665
              
              $
              3,739
              
              
              21.99
              %Per
                  common share:Net
                  income (basic)
              
              $
              .37
              
              $
              .36
              
              $
              .40
              
              $
              .41
              
              
              20.59
              %Net
                  income (diluted)
              
              $
              .36
              
              $
              .36
              
              $
              .40
              
              $
              .41
              
              
              20.59
              %Cash
                  dividends
              
              
              .13
              
              
              .13
              
              
              .13
              
              
              .13
              
              
              -




**FINANCIAL
      CONDITION**





**Earning
      Assets**





The
      average earning asset mix for 2007 was 82.16% in loans, 17.27% in investments,
      and .57% in short-term funds. The average earning asset mix for 2006 was 80.61%
      in loans, 17.97% in investments and 1.42% in short-term funds. The average
      earning asset mix for 2005 was 81.67% in loans, 17.38% in investments, and
      .95%
      in short-term funds. Loans held for investment grew by 12.15% in 2007 while
      deposits grew by 6.45%. Excluding acquisitions, loans held for investment grew
      by 4.71% in 2006, while deposits grew by 4.82%. Loans held for investment grew
      by 12.08% in 2005 while deposits grew by 10.99%. A significant factor
      influencing the lower loan growth in 2006 was a higher interest rate
      environment. The prime rate on loans was 5.25% at December 31, 2004, 7.25%
      at
      December 31, 2005, 8.25% at December 31, 2006 and 7.25% at December 31, 2007.The
      following table shows the volume changes in loans and deposits over the last
      three years:


(*Dollars
                in thousands*)
              
              2007
              
              2006
              
              2005Net
                  increase in loans
              
              $
              132,152
              
              $
              43,977
              
              $
              100,594Net
                  increase in deposits
              
              
              76,473
              
              
              46,901
              
              
              96,407Ratio
                  of loan growth to deposit growth
              
              
              172.81
              %
              
              93.77
              %
              
              104.34
              %




The
      change in 2006 excludes the effect of acquisitions.





22





FIRST
      M&F CORPORATION AND SUBSIDIARY








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. This effect was felt primarily in the form of
      a
      slowdown in lending activity rather than as deterioration in credit quality
      in
      the existing portfolio. Loan growth for 2007 and 2006 was made up primarily
      of
      real estate loans, while loan growth for 2005 was due to growth of commercial
      and real estate loans. Excluding acquisitions commercial loans grew by 12.29%
      in
      2007, decreased by 5.57% in 2006 and grew by 17.76% in 2005. The asset-based
      lending operation portfolio in Memphis, M&F Business Credit, Inc., grew by
      7.11% in 2007, was relatively flat in 2006 and accounted for 20.51% of the
      increase in commercial loans during 2005. Commercial real estate-secured loans,
      excluding the effect of acquisitions, grew by 17.65% in 2007 and grew by 11.84%
      in 2006 after growing by 25.39% in 2005. In 2006 the strongest loan growth
      occurred in the Memphis, Tennessee metropolitan area and DeSoto County,
      Mississippi. Loan growth in 2005 occurred primarily in Madison, Rankin and
      DeSoto Counties and in the college markets of Oxford and Starkville,
      Mississippi. The strength of the Madison, Hinds, Lee and DeSoto Counties
      economies has 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.
      Consumer loans decreased by 10.92% in 2007, decreased by 18.86% in 2006, and
      decreased by 11.18% in 2005, excluding the effect of acquisitions. Consumer
      loan
      growth has been problematic for the Company since exiting the indirect
      automobile lending business in 2000. Home equity loans, excluding acquired
      loans, increased by 14.58% in 2007, were down in 2006 and flat for 2005. The
      commercial lending staff has been increased since 2002 in an effort to grow
      commercial and real estate-secured commercial loans, and the Company looks
      to
      the small business market for loan as well as deposit growth.





The
      Company’s strategy is to continue to grow the loan portfolio in the stronger
      economic markets. The stronger markets currently are the Jackson, Mississippi
      metro market, the Memphis, Tennessee metro market, the Birmingham, Alabama
      metro
      market and the northwestern Florida panhandle. However, a general economic
      slowdown could negatively affect loan growth in the metropolitan markets.
      Management expects moderate loan growth over the next twelve
      months.





The
      Company’s investment portfolio decreased by 9.43% in 2007, increased by 41.47%
      in 2006, and increased by 5.36% in 2005. During 2007 the Company used cash
      flows
      from maturities in the investment portfolio to fund loan growth. The only
      significant change in the investment portfolio was a pre-funding of
      approximately $30 million of maturities that are expected in the first quarter
      of 2008. The Company used borrowings from the FHLB to purchase a mix of 30-year
      mortgage-backed securities and 10-year municipal securities. The FHLB borrowings
      will be repaid with the 2008 investment maturities. The Company engaged in
      this
      strategy to take advantage of the current market yields in 2007, expecting
      rates
      to fall over the next several months. The 2006 growth, excluding portfolios
      acquired, was 12.89%. In 2006 the Company purchased $36.8 million in U.S.
      Government sponsored entity securities and $34.0 million in mortgage-backed
      securities. The U.S. Government sponsored entity security purchases, occurring
      primarily during the first half of 2006, were funded by a mix of cash flows
      from
      maturities and from deposit growth. The mortgage-backed security purchases,
      occurring primarily during the fourth quarter of 2006, were funded by a mix
      of
      principal payment cash flows and Federal Home Loan Bank borrowings. The purpose
      of the mortgage-backed security purchases was to take advantage of attractive
      yield spreads at the time. In 2005 the Company purchased $53.7 million in U.
      S.
      Government sponsored entity securities to replace $44.0 million of maturities
      and to create a liquidity portfolio primarily for public funds deposit demands.
      The Company also purchased $19.0 million in mortgage-backed securities with
      funds obtained through deposit growth and other mortgage-backed securities
      principle payments of $15.6 million. The mortgage-backed securities were
      purchased mainly for their attractive yields and secondarily for the liquidity
      provided through the monthly principal payments. As of December 31, 2007,
      municipal securities represented 22.15% of total debt securities as compared
      to
      19.46% at December 31, 2006 and 28.22% at December 31, 2005. The Company uses
      investments in municipal securities for their tax benefits and also to take
      advantage of local investment opportunities.





The
      Company has six investments in collateralized debt obligations (CDOs) that
      hold
      trust preferred securities as collateral. These securities had an amortized
      cost
      of $5.026 million and a market value of $4.675 million at December 31, 2007.
      These CDOs are valued based on dealer quotes, liquidity factors and credit
      quality assumptions about the underlying financial institution trust preferred
      obligors. Management evaluated the status of these unrealized losses, reviewing
      the credit quality of the underlying collateral and the market’s liquidity, and
      determined that the unrealized losses were temporary. Therefore no losses on
      these securities have been recognized in earnings.





**Liability
      Management**





Deposits
      increased by 6.45% in 2007, by 4.82% in 2006, excluding acquisitions, and
      increased by 10.99% in 2005. Consumer and commercial deposits, excluding
      acquisitions, increased by 5.97% in 2007, by 8.83% in 2006 and by 11.17% in
      2005. Public funds, deposits of states and local municipalities, increased
      by
      9.41% in 2007, decreased by 14.80%, excluding acquisitions, in 2006 and grew
      by
      10.12% in 2005. 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
      successfully promoted special money-market accounts to large-balance customers
      and single-service loan customers during 2007 in an effort to build core deposit
      relationships. Public funds were grown primarily through certificates of
      deposit. Attala, Bolivar, DeSoto, and Lafayette Counties in Mississippi provided
      the majority of the consumer and commercial deposit growth during 2006. However,
      most of the Company’s markets experienced deposit growth during 2006. Consumer
      and commercial noninterest-bearing deposits decreased by $17.809 million while
      NOW and MMDA balances increased by $14.047 million. The largest source of
      deposit funds for 2006 was commercial and consumer certificates of deposit
      which
      increased by $76.277 million. As interest rates increased from 2004 through
      2006, certificates of deposit became more attractive. Public funds certificates
      of deposit provided $15.076 million in growth during 2006. Public funds balances
      in NOW and MMDA accounts decreased by $41.251 million during 2006 as contractual
      relationships matured. The large growth in public funds deposits is a natural
      trend that occurs during the early months of the year as tax receipts are
      collected.





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FIRST
      M&F CORPORATION AND SUBSIDIARY





The
      funds
      generally move out during the summer months as spending occurs. The Company
      also
      used special certificate of deposit promotions in 2006 and 2007 to attract
      consumer funds. Core deposit growth is expected to be a primary component of
      the
      Company’s funding in the foreseeable future. The Company’s business development
      strategy includes the acquisition of noninterest-bearing and interest-bearing
      demand deposits held by customers who primarily use the Company as a source
      of
      credit.





The
      Company is also restructuring its demand, NOW and money-market accounts and
      will
      continue the effort in 2008. A new NOW account was introduced in December 2007
      that features an attractive rate and incentives to use electronic banking and
      other technology-based applications. The noninterest-bearing demand deposit
      accounts are being restructured into primarily two accounts, both of which
      offer
      a variety of add-ons that enhance the value of the product. Additionally, the
      Company is extending the use of the free-checking product. Management believes
      that these products will make sales and cross-selling efforts more successful
      due to their enhanced benefits. These product changes align with the Company’s
      strategy of creating ways to build core deposits.





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





*(Dollars
                in thousands)*
            
            December
                31, 2007
            
            December
                31, 2006
            
            December
                31, 2005Noninterest-bearing
                demand
            
            $
            191,206
            
            $
            180,273
            
            $
            164,189NOW deposits
            
            
            190,067
            
            
            199,666
            
            
            192,792Money
                market deposits
            
            
            156,364
            
            
            128,694
            
            
            115,509Savings
                deposits
            
            
            105,924
            
            
            94,815
            
            
            82,512Certificates
                of deposit
            
            
            590,831
            
            
            547,513
            
            
            397,835Brokered
                certificates of deposit
            
            
            28,063
            
            
            35,021
            
            
            20,834Total
            
            $
            1,262,455
            
            $
            1,185,982
            
            $
            973,671





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





*(Dollars
                in thousands)*
            
            December
                31, 2007
            
            December
                31, 2006
            
            December
                31, 2005Noninterest-bearing
                demand
            
            $
            6,990
            
            $
            4,733
            
            $
            4,331NOW
                deposits
            
            
            66,157
            
            
            73,899
            
            
            84,539Money
                market deposits
            
            
            15,336
            
            
            17,953
            
            
            28,772Savings
                deposits
            
            
            290
            
            
            393
            
            
            241Certificates
                of deposit
            
            
            89,842
            
            
            65,936
            
            
            47,137Brokered
                certificates of deposit
            
            
            1,580
            
            
            1,779
            
            
            428Total
            
            $
            180,195
            
            $
            164,693
            
            $
            165,448





Other
      borrowings increased by 20.98% in 2007 after increasing by 12.03% in 2006 and
      by
      15.29% in 2005. Approximately $30.000 million of the increase was used in an
      investment strategy that is designed to liquidate in early 2008. The remainder
      of the growth in other borrowings was due to normal demands related to lending
      activity. The Company used other borrowings as a source of liquidity for 2004
      through 2006. Borrowings in 2006 were used to fund public deposit maturities
      as
      well as to fund fourth quarter investment purchases. Borrowings in 2005 were
      generally used to fund loans in the two to five year maturity ranges. As the
      loan portfolio has become a larger percentage of the assets of the Company,
      borrowings have been used to fund those increases that are beyond the deposit
      growth and ordinary investment portfolio maturities.





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.





The
      Company issued $30.928 million in junior subordinated debt related to a
      trust-preferred security financing in February 2006. The proceeds were used
      to
      acquire Columbiana Bancshares. The debt has a fixed rate for five years and
      a
      LIBOR-based floating rate for an additional fifteen years. The subordinated
      debt, net of the Company’s investment in the financing entity, is treated as
      Tier 1 capital for regulatory reporting purposes. The Company expects to have
      sufficient cash flows to retire the debt according to its contract.





**Business
      Combinations**





In
      February 2006 the Company acquired Columbiana Bancshares for $31.294 million
      in
      cash, adding approximately $195 million in assets. In May 2007 the Company
      acquired Crockett County Bancshares for $7.5 million, adding approximately
      $34
      million in assets. The Columbiana acquisition expanded the Company into the
      Birmingham, Alabama market. Although growth in the Alabama branches was flat
      during 2006, they provided $24.392 million in loan growth during 2007. The
      Alabama acquisition was accretive to earnings during 2007.





The
      Crockett County Bancshares acquisition allowed the Company to expand its banking
      operations into the Memphis, Tennessee market. Loans grew by $35.031 million
      and
      deposits grew by $19.439 million in the Memphis, Tennessee market during
      2007.





24





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 program and are
      overdrawn in excess of thirty days are generally charged-off. Deposits in the
      overdraft program that have been overdrawn continuously for sixty days are
      funded through the offering of a “fresh start” loan with overdraft privileges
      being removed. Any fresh start loan that becomes thirty days past due is charged
      off to the allowance for loan losses.





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





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





The
      following table shows nonperforming loans and other assets of the
      Company:





December
                31(*Dollars
                in thousands*)
            
            2007
            
            2006
            
            2005Nonaccrual
                loans
            
            $
            6,524
            
            $
            3,557
            
            $
            1,403Past
                    due 90 days or more and still accruing
                    interest
            
            
            1,093
            
            
            376
            
            
            510Total
                nonperforming loans
            
            
            7,617
            
            
            3,933
            
            
            1,913Other
                real estate
            
            
            6,232
            
            
            3,135
            
            
            3,042Total
                nonperforming assets
            
            $
            13,849
            
            $
            7,068
            
            $
            4,955Ratios:Nonperforming
                loans to loans
            
            
            0.62
            %
            
            0.36
            %
            
            0.20
            %Nonperforming
                assets to assets
            
            
            0.84
            %
            
            0.46
            %
            
            0.39
            %





The
      increase in non-performing loans was heavily influenced by the deterioration
      of
      two residential development credits in the Memphis, Tennessee, metro market
      totaling $2.2 million. Other real estate was affected primarily by one
      residential development credit secured by lots in north Mississippi and one
      commercial development in Shelby County, Alabama, totaling a combined $2.0
      million.





It
      is
      possible that there will be further negative effects stemming from the subprime
      and real estate problems of 2007. These effects could materialize in the form
      of
      a continued slowdown in housing, reduced market values of residential properties
      and a general economic slowdown. All of these factors, either individually
      or in
      combination, could have negative effects on the Company’s ability to collect
      loans related to residential construction. These conditions may result in
      reductions in collateral values which could require the Company to recognize
      losses on these loans.





25





FIRST
      M&F CORPORATION AND SUBSIDIARY





The
      following table shows the Company’s exposure to residential construction and
      subdivision development loans at December 31, 2007:





*(Dollars
                in thousands)*
            
            Residential
            
            SubdivisionConstruction
            
            Development
            
            TotalBalances
                outstanding
            
            $
            70,471
            
            $
            20,816
            
            $
            91,287Nonaccrual
                balances
            
            
            1,778
            
            
            -
            
            
            1,778Balances
                90-days past due and still accruing
            
            
            377
            
            
            2
            
            
            379Net
                charge-offs incurred in 2007
            
            
            170
            
            
            -
            
            
            170Nonaccrual
                balances to total balances
            
            
            2.52
            %
            
            -
            %
            
            1.95
            %





Management
      does not know of any material contingencies that could negatively affect the
      remainder of the loan portfolio during 2008. However, credit quality will be
      impacted by any effect that a potential slow-down in the economy may have on
      the
      Memphis, Tennessee, Birmingham, Alabama and Crestview, Florida metropolitan
      and
      surrounding markets.





**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.





From
      August of 2002 through May of 2006, the Company had a general purpose stock
      repurchase plan in effect. Share repurchases ended in 2005, and the Company
      did
      not have any plan in effect beyond May 2006.





During
      2005 the Company repurchased 40,000 shares, related to its 2004 and 2005
      repurchase programs, at an average price of $17.24 per share.





On
      December 12, 2007, the Company’s Board of Directors authorized a new 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 are subject to management’s discretion and
      will depend on market considerations. The Board will review the repurchase
      program at the end of 2008 to determine whether to renew the plan for an
      additional twelve month period. The reacquired shares will be held as authorized
      but unissued shares to be used for general corporate purposes.





During
      2007, the Company issued 19,854 shares related to stock option exercises, at
      an
      average price of $15.37 per share. During 2006, the Company issued 55,908 shares
      related to stock option exercises, at an average price of $14.12 per share.
      During 2005, the Company issued 12,000 shares related to stock option exercises,
      at an average price of $13.28 per share.





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





**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. The asset-liability
      management committee monitors the interest-sensitivity gap on a monthly basis.
      During 2007 and 2006 the Company maintained its interest rate sensitivity at
      a
      slightly negative repricing gap. This means that, over the term of one year,
      more liabilities are scheduled to reprice than the amount of assets that are
      scheduled to reprice. During 2007, the Company maintained a negative repricing
      gap, making liabilities more sensitive than assets to changes in interest rates.
      At the end of 2007 the one-year repricing gap stood at -6.89% as compared to
      -5.43% at the end of 2006. According to interest-rate sensitivity analysis,
      the
      Company has low-to-moderate interest rate risk.





26





FIRST
      M&F CORPORATION AND SUBSIDIARY





**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%, ending 2007 with a 32.50% ratio, ending 2006 with a ratio
      of 33.77% and ending 2005 with a ratio of 36.79%. The Company maintained a
      $.50
      annual dividend rate for 1999 through the first quarter of 2005. The dividend
      rate was changed to $.52 annually during the second quarter of 2005. The ratio
      of capital to assets stood at 8.47% at December 31, 2007, 8.31% at December
      31,
      2006 and 9.26% at December 31, 2005, with risk-based capital ratios well in
      excess of the regulatory requirements. The Company has sufficient lines of
      credit at commercial banks to raise additional funds if needed. 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 effected a 2-for-1 stock split distributed in the form of a dividend
      on
      May 15, 2006. All share and stock price related amounts for periods prior to
      the
      split have been revised to reflect the effect of the stock split. The purpose
      of
      the split was to provide more liquidity to the market for the Company’s stock.
      The Company’s shares traded at a rate of approximately 2,800 shares per day
      during 2007. There are two analysts who follow the Company and issue earnings
      forecasts.





The
      Company’s regulatory capital ratios for 2007 and 2006 are summarized in Note 21
      of the audited financial statements included in Item 8, Financial Statements
      and
      Supplementary Data, in this Form 10-K.





**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, 2007 the Company
      had $230.280 million in unused loan commitments outstanding. Of these
      commitments, $124.519 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 2007. At December
      31, 2007 the Company had $17.357 million in financial standby letters of credit
      issued and outstanding.





At
      December 31, 2007 there were $22.999 million in standby letters of credit issued
      on the Company’s behalf by a Federal Home Loan Bank. At December 31, 2006 there
      were $4.999 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 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 $148 thousand at December 31, 2007 and $107 thousand at December 31, 2006
      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
      $10.822 million at December 31, 2007. 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, 2007 mortgage origination-related
      derivatives with positive fair values of $26 thousand were included in other
      assets and derivatives with negative fair values of $20 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, 2007 the Company
      had $3.833 million in locked forward sales agreements in place. Forward
      sale-related derivatives with positive fair values of $3 thousand were included
      in other assets and derivatives with negative fair values of $19 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 $5.120 million
      at December 31, 2007. 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
      guarantees the lease payments for its wholly-owned banking subsidiary in one
      data processing lease which expires in September 2008. The remaining payments
      on
      the lease at December 31, 2007 were $236 thousand.





27





FIRST
      M&F CORPORATION AND SUBSIDIARY





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.





**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
            
            $
            131,312
            
            $
            47,299
            
            $
            72,887
            
            $
            7,362
            
            $
            3,764Junior
                Subordinated Debentures
            
            
            30,928
            
            
            -
            
            
            -
            
            
            -
            
            
            30,928Capital
                Lease Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                Leases
            
            
            4,777
            
            
            1,425
            
            
            1,557
            
            
            611
            
            
            1,184Purchase
                Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                Long-Term Liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            167,017
            
            $
            48,724
            
            $
            74,444
            
            $
            7,973
            
            $
            35,876





Long-term
      debt obligations primarily represent borrowings from the Federal Home Loan
      Bank
      that have an original maturity in excess of one (1) year. 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)  Goodwill,
      intangible assets and related impairment


(3)  Contingent
      liabilities





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 collectibility of individual loans and reflects that
      collectibility 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 loans are impaired
      and to group unimpaired 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 unimpaired loans. 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.





28





FIRST
      M&F CORPORATION AND SUBSIDIARY





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.





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.





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





The
      estimate of fair value is dependent on such assumptions as: (1) future cash
      flows determined from the budget, strategic plan, and forecasts of growth,
      and
      (2) discount rates and earnings multiples used to determine the present value
      of
      those cash flows. Management uses a model similar to those used to evaluate
      potential mergers and acquisitions. No impairments have been recognized since
      beginning testing in 2002.





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.





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 a loss 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.





29





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, 2007, 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 Report
                As of December 31, 2007*(Dollars
                in thousands)*
            
            0-12
                months
            
            1-5
                years
            
            Over
                5 years
            
            TotalShort-term
                funds
            
            $
            5,480
            
            $
            -
            
            $
            -
            
            $
            5,480Investments
            
            
            123,201
            
            
            82,762
            
            
            31,175
            
            
            237,138Loans
            
            
            734,524
            
            
            448,919
            
            
            41,563
            
            
            1,225,006Total
                earning assets
            
            
            863,205
            
            
            531,681
            
            
            72,738
            
            
            1,467,624NOW,
                MMDA & savings deposits
            
            
            299,833
            
            
            21,938
            
            
            130,584
            
            
            452,355Time
                deposits
            
            
            547,160
            
            
            71,734
            
            
            -
            
            
            618,894Short-term
                borrowings
            
            
            9,676
            
            
            -
            
            
            -
            
            
            9,676Other
                borrowings
            
            
            120,421
            
            
            77,456
            
            
            34,363
            
            
            232,240Total
                int. bearing liabilities
            
            
            977,090
            
            
            171,128
            
            
            164,947
            
            
            1,313,165Rate
                sensitive gap
            
            $
            (113,885
            )
            $
            360,553
            
            $
            (92,034
            )Cumulative
                gap
            
            $
            (113,885
            )
            $
            246,668
            
            $
            154,459Cumulative
                % of assets
            
            
            -6.89
            %
            
            14.91
            %
            
            9.34
            %





Interest
      rate shock analysis shows that the Company will experience a 4.67% decrease
      over
      12 months in its net interest income with a gradual (12 month ramp) and
      sustained 200 basis point decrease in interest rates. A gradual and sustained
      increase in interest rates of 200 basis points will result in a 2.69% increase
      in net interest income **.** While
      the
      repricing gap suggests a potential earnings benefit should rates fall, the
      net
      interest income simulation depicts slight exposure. This is due to inherent
      pricing lags of deposit products in relation to changes in market rate movement
      and the acceleration of loan and investment cash flows that would likely occur
      if market rates fall. Conversely, the lagging nature of the deposit base proves
      beneficial if interest rates rise.





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 1.34% with an
      immediate and sustained increase in interest rates of 200 basis points. The
      market value of equity will decrease by 11.80% with an immediate and sustained
      decrease in interest rates of 200 basis points. These simulated changes in
      market value of equity are strongly influenced by the shorter duration of loans
      due to the percentage of the portfolio represented by floating-rate loans.
      In a
      rising rate environment, fixed-rate loan durations tend to extend and deposit
      durations tend to decrease, typically causing a decrease in market value of
      equity. The floating-rate loans have an offsetting effect on the typical
      duration changes. The directional change of the market values of assets and
      liabilities under rising and falling rate shocks compliment the exposure profile
      illustrated by the net interest income simulation, outlined above.





The
      Company has no hedging instruments in place at December 31, 2007.




30





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 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, 2007. Shearer, Taylor & Co., P.A., the
      independent registered public accounting firm that audited the consolidated
      financial statements of the Company included in this Annual Report on Form
      10-K,
      has issued an attestation report on the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2007, as stated in their
      report which is contained herein.





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





31




FIRST
      M&F CORPORATION AND SUBSIDIARY




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


First
      M&F Corporation


Kosciusko,
      Mississippi





We
      have
      audited First M&F Corporation’s internal control over financial reporting as
      of December 31, 2007, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      First M&F Corporation’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting included in the
      accompanying *Management’s
      Annual Report on Internal Control over Financial Reporting* .
      Our
      responsibility is to express an opinion on the company’s internal control over
      financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit of internal control over financial reporting included
      obtaining an understanding of internal control over financial reporting,
      assessing the risk that a material weakness exists, and testing and evaluating
      the design and operating effectiveness of internal control based on the assessed
      risk. Our audit also included performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, First M&F Corporation maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2007,
      based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated statements of condition and
      the related consolidated statements of income, comprehensive income,
      stockholders’ equity and cash flows of First M&F Corporation and subsidiary,
      and our report dated February 22, 2008, expressed an unqualified opinion.




/s/
                Shearer, Taylor & Co., P.A.Ridgeland,
                MississippiFebruary
                22, 2008





32


FIRST
        M&F CORPORATION AND SUBSIDIARY


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      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 and subsidiary as of December 31, 2007 and 2006, and the related
      consolidated statements of income, comprehensive income, stockholders' equity
      and cash flows for each of the years in the three-year period ended December
      31,
      2007. First M&F Corporation’s management is responsible for these financial
      statements. Our responsibility is to express an opinion on these financial
      statements based on our audits.





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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of First M&F
      Corporation and subsidiary as of December 31, 2007 and 2006, and the results
      of
      their consolidated operations and their consolidated cash flows for each of
      the
      years in the three-year period ended December 31, 2007, in conformity with
      accounting principles generally accepted in the United States of
      America.





As
      discussed in note 18 to the consolidated financial statements, the First M&F
      Corporation changed its method of accounting for its defined benefit pension
      plan in 2006 in accordance with the provisions of Statement of Financial
      Accounting Standards No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* .





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), First M&F Corporation’s internal control
      over financial reporting as of December 31, 2007, based on criteria established
      in *Internal
      Control*  *-
      Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      and our report dated February 22, 2008, expressed an unqualified
      opinion.








/s/
              Shearer, Taylor & Co., P.A.Ridgeland, MississippiFebruary 22, 2008




33




FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Condition


December
      31, 2007 and 2006


(In
      Thousands, Except Share Data)





2007
            
            2006AssetsCash
                and due from banks
            
            $
            54,240
            
            $
            59,793Interest-bearing
                bank balances
            
            
            3,480
            
            
            3,690Federal
                funds sold
            
            
            2,000
            
            
            -Securities
                    available for sale, amortized cost of $236,575 and
                    $263,238
            
            
            237,138
            
            
            261,828Loans
                held for sale
            
            
            5,571
            
            
            7,263Loans,
                net of unearned income
            
            
            1,219,435
            
            
            1,087,283Allowance
                for loan losses
            
            
            (14,217
            )
            
            (14,950
            )Net
                loans
            
            
            1,205,218
            
            
            1,072,333Bank
                premises and equipment
            
            
            45,545
            
            
            41,128Accrued
                interest receivable
            
            
            12,434
            
            
            12,590Other
                real estate
            
            
            6,232
            
            
            3,135Goodwill
            
            
            32,572
            
            
            32,572Other
                intangible assets
            
            
            7,612
            
            
            8,113Other
                assets
            
            
            41,709
            
            
            37,830$
            1,653,751
            
            $
            1,540,275Liabilities
                and Stockholders’ EquityLiabilities:Noninterest-bearing
                deposits
            
            $
            191,206
            
            $
            180,273Interest-bearing
                deposits
            
            
            1,071,249
            
            
            1,005,709Total
                deposits
            
            
            1,262,455
            
            
            1,185,982Short-term
                borrowings
            
            
            9,676
            
            
            19,612Other
                borrowings
            
            
            201,312
            
            
            166,400Junior
                subordinated debt
            
            
            30,928
            
            
            30,928Accrued
                interest payable
            
            
            5,151
            
            
            4,784Other
                liabilities
            
            
            4,131
            
            
            4,503Total
                liabilities
            
            
            1,513,653
            
            
            1,412,209Noncontrolling
                joint venture interest
            
            
            18
            
            
            19Stockholders’
                equity:Preferred
                stock:Class
                A; 1,000,000 shares authorized
            
            
            -
            
            
            -Class
                B; 1,000,000 shares authorized
            
            
            -
            
            
            -Common
                    stock of $5.00 par value; 15,000,000 shares authorized: 9,067,580
                    and
                    9,046,226 shares issued
            
            
            45,338
            
            
            45,231Additional
                paid-in capital
            
            
            30,475
            
            
            30,315Nonvested
                restricted stock awards
            
            
            643
            
            
            375Retained
                earnings
            
            
            64,395
            
            
            54,707Accumulated
                other comprehensive income (loss)
            
            
            (771
            )
            
            (2,581
            )Total
                stockholders’ equity
            
            
            140,080
            
            
            128,047$
            1,653,751
            
            $
            1,540,275





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





34




FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Income


Years
      Ended December 31, 2007, 2006 and 2005


(In
      Thousands, Except Share Data)





2007
            
            2006
            
            2005Interest
                income:Interest
                and fees on loans
            
            $
            89,796
            
            $
            79,654
            
            $
            59,022Interest
                on loans held for sale
            
            
            439
            
            
            428
            
            
            421Taxable
                investments
            
            
            9,514
            
            
            8,695
            
            
            5,797Tax-exempt
                investments
            
            
            1,798
            
            
            1,938
            
            
            2,024Federal
                funds sold
            
            
            144
            
            
            543
            
            
            194Interest-bearing
                bank balances
            
            
            225
            
            
            247
            
            
            76Total
                interest income
            
            
            101,916
            
            
            91,505
            
            
            67,534Interest
                expense:Deposits
            
            
            36,632
            
            
            29,643
            
            
            17,728Short-term
                borrowings
            
            
            609
            
            
            417
            
            
            776Other
                borrowings
            
            
            8,644
            
            
            7,348
            
            
            4,680Junior
                subordinated debt
            
            
            1,991
            
            
            1,748
            
            
            -Total
                interest expense
            
            
            47,876
            
            
            39,156
            
            
            23,184Net
                interest income
            
            
            54,040
            
            
            52,349
            
            
            44,350Provision
                for loan losses
            
            
            2,520
            
            
            3,032
            
            
            3,146Net
                interest income afterprovision
                for loan losses
            
            
            51,520
            
            
            49,317
            
            
            41,204Noninterest
                income:Service
                charges on deposit accounts
            
            
            10,962
            
            
            10,398
            
            
            8,475Mortgage
                banking income
            
            
            1,491
            
            
            1,299
            
            
            820Agency
                commission income
            
            
            4,148
            
            
            3,920
            
            
            3,910Trust
                and brokerage income
            
            
            598
            
            
            616
            
            
            484Bank
                owned life insurance income
            
            
            689
            
            
            584
            
            
            429Loss
                on extinguishment of debt
            
            
            (126
            )
            
            -
            
            
            -Securities
                gains (losses), net
            
            
            (37
            )
            
            (4
            )
            
            (24
            )Other
                income
            
            
            3,327
            
            
            3,040
            
            
            2,445Total
                noninterest income
            
            
            21,052
            
            
            19,853
            
            
            16,539Noninterest
                expenses:Salaries
                and employee benefits
            
            
            29,348
            
            
            27,590
            
            
            22,738Net
                occupancy expenses
            
            
            3,841
            
            
            3,325
            
            
            2,544Equipment
                expenses
            
            
            3,629
            
            
            3,495
            
            
            2,552Software
                and processing expenses
            
            
            1,463
            
            
            1,281
            
            
            1,144Telecommunications
                expenses
            
            
            1,091
            
            
            1,049
            
            
            785Marketing
                and business development expenses
            
            
            1,705
            
            
            1,421
            
            
            1,380Intangible
                asset amortization
            
            
            547
            
            
            330
            
            
            55Other
                expenses
            
            
            9,481
            
            
            10,140
            
            
            7,943Total
                noninterest expenses
            
            
            51,105
            
            
            48,631
            
            
            39,141Income
                before income taxes
            
            
            21,467
            
            
            20,539
            
            
            18,602Income
                taxes
            
            
            6,988
            
            
            6,604
            
            
            6,004Noncontrolling
                interest in earnings (losses) ofsubsidiaries,
                net of income taxes of $13, $6, and $4
            
            
            21
            
            
            10
            
            
            6Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Earnings
                per share:Basic
            
            $
            1.60
            
            $
            1.54
            
            $
            1.40Diluted
            
            
            1.59
            
            
            1.53
            
            
            1.40





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





35





FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Comprehensive Income


Years
      Ended December 31, 2007, 2006 and 2005


(In
      Thousands)





2007
            
            2006
            
            2005Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Other
                comprehensive income:Unrealized
                gains (losses) on securities:Unrealized
                        gains (losses) on securities available for sale arising during
                        the period,
                        net of tax of $723, $90, and
                        $1,507
            
            
            1,213
            
            
            (153
            )
            
            (2,534
            )Reclassification
                  adjustment for (gains) losses on securities available for sale
                  included in
                  net income, net of tax of $13, $1, and $9
            
            
            24
            
            
            3
            
            
            15Defined
                benefit pension plans:Net
                  actuarial gains (losses) arising during the period, net of tax
                  of
                  $203
            
            
            341
            
            
            -
            
            
            -Amortization
                of transition asset, net of tax of $3
            
            
            (6
            )
            
            -
            
            
            -Amortization
                of prior service cost, net of tax of $14
            
            
            (23
            )
            
            -
            
            
            -Amortization
                of actuarial loss, net of tax of $156
            
            
            261
            
            
            -
            
            
            -Minimum
                  pension liability adjustment, net of tax of $0, $1,101, and
                  $180
            
            
            -
            
            
            1,849
            
            
            (301
            )Other
                comprehensive income
            
            
            1,810
            
            
            1,699
            
            
            (2,820
            )Total
                comprehensive income
            
            $
            16,268
            
            $
            15,624
            
            $
            9,772





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





36





FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Stockholders' Equity


Years
      Ended December 31, 2007, 2006 and 2005


(In
      Thousands, Except Share Data)


Nonvested
              
              
              
              AccumulatedAdditional
              
              Restricted
              
              
              
              OtherCommon
              
              Paid-in
              
              Stock
              
              Retained
              
              ComprehensiveStock
              
              Capital
              
              Awards
              
              Earnings
              
              Income
              
              TotalJanuary
                  1, 2005
              
              $
              22,531
              
              $
              29,587
              
              $
              -
              
              $
              60,113
              
              $
              237
              
              $
              112,468Effect
                  of stock split effected in the form of a 100% stock dividend on
                  May 15,
                  2006
              
              
              22,531
              
              
              (4
              )
              
              -
              
              
              (22,527
              )
              
              -
              
              
              -January
                  1, 2005, adjusted
              
              
              45,062
              
              
              29,583
              
              
              -
              
              
              37,586
              
              
              237
              
              
              112,468Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              12,592
              
              
              -
              
              
              12,592Cash
                  dividends ($.52 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,648
              )
              
              -
              
              
              (4,648
              )6,000
                  shares of unrestricted stock awards issued
              
              
              30
              
              
              71
              
              
              -
              
              
              -
              
              
              -
              
              
              10112,000
                  common shares issued in exercise of stock options
              
              
              60
              
              
              99
              
              
              -
              
              
              -
              
              
              -
              
              
              15940,000
                  common shares repurchased
              
              
              (200
              )
              
              (490
              )
              
              -
              
              
              -
              
              
              -
              
              
              (690
              )Share-based
                  compensation recognized
              
              
              -
              
              
              10
              
              
              86
              
              
              1
              
              
              -
              
              
              97Tax
                  benefits on stock option transactions
              
              
              -
              
              
              118
              
              
              -
              
              
              -
              
              
              -
              
              
              118Net
                  change
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,820
              )
              
              (2,820
              )December
                  31, 2005
              
              
              44,952
              
              
              29,391
              
              
              86
              
              
              45,531
              
              
              (2,583
              )
              
              117,377Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              13,925
              
              
              -
              
              
              13,925Cash
                  dividends ($.52 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,751
              )
              
              -
              
              
              (4,751
              )55,908
                  common shares issued in exercise of stock options
              
              
              279
              
              
              510
              
              
              -
              
              
              -
              
              
              -
              
              
              789Share-based
                  compensation recognized
              
              
              -
              
              
              20
              
              
              289
              
              
              2
              
              
              -
              
              
              311Tax
                  benefits on stock option transactions
              
              
              -
              
              
              394
              
              
              -
              
              
              -
              
              
              -
              
              
              394Net
                  change
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,699
              
              
              1,699Adjustment
                  to initially apply FASB Statement No. 158, net of tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,697
              )
              
              (1,697
              )December
                  31, 2006
              
              
              45,231
              
              
              30,315
              
              
              375
              
              
              54,707
              
              
              (2,581
              )
              
              128,047Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              14,458
              
              
              -
              
              
              14,458Cash
                  dividends ($.52 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,772
              )
              
              -
              
              
              (4,772
              )19,854
                  common shares issued in exercise of stock options
              
              
              99
              
              
              206
              
              
              -
              
              
              -
              
              
              -
              
              
              305Share-based
                  compensation 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
              
              
              1,810December
                  31, 2007
              
              $
              45,338
              
              $
              30,475
              
              $
              643
              
              $
              64,395
              
              $
              (771
              )
              $
              140,080





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





37




FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2007, 2006 and 2005


(In
      Thousands)





2007
            
            2006
            
            2005Cash
                flows from operating activities:Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Share-based
                compensation
            
            
            319
            
            
            311
            
            
            198Amortization
                of pension costs
            
            
            279
            
            
            167
            
            
            133Depreciation
                and amortization
            
            
            3,271
            
            
            2,942
            
            
            1,998Provision
                for loan losses
            
            
            2,520
            
            
            3,032
            
            
            3,146Net
                investment amortization (accretion)
            
            
            (343
            )
            
            (382
            )
            
            444Capitalized
                dividends on FHLB stock
            
            
            (382
            )
            
            (361
            )
            
            (298
            )Net
                change in unearned fees/deferred costs on loans
            
            
            116
            
            
            92
            
            
            159Net
                accretion of discount on time deposits
            
            
            68
            
            
            139
            
            
            45Net
                accretion of discount on debt
            
            
            -
            
            
            16
            
            
            -Loss
                on extinguishment of debt
            
            
            126
            
            
            -
            
            
            -Loss
                on securities available for sale
            
            
            37
            
            
            4
            
            
            24Gains
                on loans held for sale
            
            
            (300
            )
            
            (308
            )
            
            (231
            )Other
                asset sale losses
            
            
            224
            
            
            17
            
            
            573Earnings
                of noncontrolling interests
            
            
            34
            
            
            16
            
            
            10Deferred
                income taxes
            
            
            2,192
            
            
            29
            
            
            (241
            )(Increase)
                decrease in:Accrued
                interest receivable
            
            
            156
            
            
            (2,592
            )
            
            (1,975
            )Cash
                surrender value of bank owned life insurance
            
            
            (689
            )
            
            (528
            )
            
            (429
            )Loans
                held for sale
            
            
            2,022
            
            
            (1,285
            )
            
            6,746Other
                assets
            
            
            (2,899
            )
            
            1,064
            
            
            (1,973
            )Increase
                (decrease) in:Accrued
                interest payable
            
            
            367
            
            
            1,321
            
            
            990Other
                liabilities
            
            
            (1,594
            )
            
            (428
            )
            
            1,539Net
                cash provided by operating activities
            
            
            19,982
            
            
            17,191
            
            
            23,450Cash
                flows from investing activities:Purchases
                of securities available for sale
            
            
            (46,356
            )
            
            (72,952
            )
            
            (82,317
            )Sales
                of securities available for sale
            
            
            6,574
            
            
            10,374
            
            
            3,178Maturities
                of securities available for sale
            
            
            66,751
            
            
            38,857
            
            
            65,236Investment
                in First M&F Statutory Trust I
            
            
            -
            
            
            (928
            )
            
            -Net
                (increase) decrease in:Interest-bearing
                bank balances
            
            
            210
            
            
            6,091
            
            
            2,584Federal
                funds sold
            
            
            (2,000
            )
            
            14,807
            
            
            (150
            )Loans
            
            
            (141,252
            )
            
            (49,776
            )
            
            (105,278
            )Bank
                premises and equipment
            
            
            (7,098
            )
            
            (5,957
            )
            
            (4,773
            )Purchases
                of bank owned life insurance
            
            
            (58
            )
            
            (189
            )
            
            (94
            )Proceeds
                    from sales of other real estate and other repossessed
                    assets
            
            
            2,673
            
            
            3,506
            
            
            1,967Net
                (purchases) redemptions, of FHLB and FRB stock
            
            
            (1,288
            )
            
            1,957
            
            
            (2
            )Proceeds
                from sale of nonmarketable equity securities
            
            
            -
            
            
            827
            
            
            -Net
                cash paid in acquisitions
            
            
            (46
            )
            
            (30,851
            )
            
            -Net
                cash used in investing activities
            
            
            (121,890
            )
            
            (84,234
            )
            
            (119,649
            )Cash
                flows from financing activities:Net
                increase in deposits
            
            
            76,405
            
            
            46,760
            
            
            96,362Net
                increase (decrease) in short-term borrowings
            
            
            (9,936
            )
            
            1,550
            
            
            1,254Proceeds
                from other borrowings
            
            
            601,800
            
            
            122,812
            
            
            72,800Repayments
                of other borrowings
            
            
            (567,325
            )
            
            (128,026
            )
            
            (53,144
            )Proceeds
                from issuance of junior subordinated debt
            
            
            -
            
            
            30,928
            
            
            -Distributions
                to, net of contributions of, noncontrolling interests
            
            
            (35
            )
            
            (18
            )
            
            10Cash
                dividends
            
            
            (4,772
            )
            
            (4,751
            )
            
            (4,648
            )Common
                shares issued
            
            
            305
            
            
            789
            
            
            159Common
                shares repurchased
            
            
            -
            
            
            -
            
            
            (690
            )Payments
                to cancel stock options
            
            
            (174
            )
            
            -
            
            
            -Tax
                benefits on stock option transactions
            
            
            87
            
            
            394
            
            
            118Net
                cash provided by financing activities
            
            
            96,355
            
            
            70,438
            
            
            112,221Net
                increase in cash and due from banks
            
            
            (5,553
            )
            
            3,395
            
            
            16,022Cash
                and due from banks at January 1
            
            
            59,793
            
            
            56,398
            
            
            40,376Cash
                and due from banks at December 31
            
            $
            54,240
            
            $
            59,793
            
            $
            56,398





38





FIRST
      M&F CORPORATION AND SUBSIDIARY


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2007, 2006 and 2005


(In
      Thousands)





2007
            
            2006
            
            2005Total
                interest paid
            
            $
            47,438
            
            $
            37,666
            
            $
            22,149Total
                income taxes paid
            
            
            7,163
            
            
            5,949
            
            
            4,500Income
                tax refunds received
            
            
            400
            
            
            10
            
            
            21Total
                payments to other banks to satisfy liens on ORE
            
            
            575
            
            
            -
            
            
            353Transfers
                of loans to foreclosed property
            
            
            5,615
            
            
            2,656
            
            
            2,121Fair
                value of identifiable assets acquired
            
            $
            46
            
            $
            212,923
            
            $
            -Goodwill
                recorded on Columbiana Bancshares acquisition
            
            
            -
            
            
            13,913
            
            
            -Goodwill
                recorded on Crockett County Bancshares acquisition
            
            
            -
            
            
            2,311
            
            
            -Cash
                paid for Columbiana Bancshares stock
            
            
            -
            
            
            (31,294
            )
            
            -Cash
                paid for Crockett County Bancshares stock
            
            
            -
            
            
            (7,472
            )
            
            -Cash
                paid for Patrick insurance business
            
            
            (46
            )
            
            -
            
            
            -Liabilities
                assumed in acquisitions
            
            $
            -
            
            $
            190,381
            
            $
            -





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




39





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. 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 51% owned accounts receivable
      financing joint venture and 55% owned title insurance agency. All significant
      intercompany balances and transactions have been eliminated in
      consolidation.





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 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. Actual results could differ
      from those estimates. The allowance for loan losses represents a significant
      estimate.





Comprehensive
      Income





Comprehensive
      income includes net income reported in the statements of income 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, (2) changes in
      minimum pension liability for 2005 through 2006 and (3) changes in net
      unamortized pension costs accounted for in accordance with FASB Statement No.
      158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans” subsequent to adoption in 2006.





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. 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.





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.





40





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      1: (Continued)





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. Expenditures for maintenance and repairs are
      charged to expense as incurred.





Other
      Real Estate





Other
      real estate acquired through partial or total satisfaction of loans is carried
      at the lower of fair value 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





The
      Company adopted Statement of Financial Accounting Standards (SFAS) 142,
“Goodwill and Other Intangible Assets,” effective January 1, 2002. Under SFAS
      142, goodwill and intangible assets that have indefinite lives are not
      amortized, but are tested for impairment annually and when there is an
      impairment indicator. Goodwill impairment losses are reported in a company’s
      income statement. Prior to adoption of SFAS 142 on January 1, 2002, goodwill
      was
      being amortized on a straight-line basis over 40 years and 15
      years.





Intangible
      assets, such as core deposit intangibles, customer renewal lists and noncompete
      agreements with determinable useful lives are amortized over their respective
      useful lives. The Company has an indefinite lived intangible asset that is
      tested for impairment annually or when an event arises or circumstances occur
      that indicate an impairment exists.





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 expense (benefit) is
      the
      result of changes in deferred tax assets and liabilities between reporting
      periods. Interest assessed by the taxing authorities is classified as interest
      expense and penalties are classified as income tax expense in the income
      statement.





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.





41




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      1: (Continued)





Recent
      Pronouncements





The
      adoption of the following recent accounting pronouncements did not have a
      material impact on the Company’s financial condition and results of
      operations:





·
            FASB
                Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting
                Changes and Error Corrections - A Replacement of APB Opinion No.
                20 and
                FASB Statement No. 3”





·
            FASB
                Staff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary
                Impairment and Its Application to Certain Investments”





·
            SEC
                Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
                Misstatements when Quantifying Misstatements in Current Year Financial
                Statements”




In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109.” This interpretation
      clarifies the accounting for uncertainty in income taxes recognized in
      accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. Generally, the entity may only recognize
      the benefit of tax positions that are more likely than not to be sustained
      upon
      examination. The amount of benefit recognized is the largest amount that is
      greater than 50% likely of being realized upon potential ultimate settlement
      (based upon the hypothetical tax examination and appeal process). The
      interpretation also provides derecognition criteria as well as guidance on
      how
      to account for potential interest and penalties. A reconciliation of the
      beginning to ending balance of uncertain tax positions is also required in
      the
      financial statement footnotes. The interpretation is effective for fiscal years
      beginning after December 15, 2006, which makes it effective as of January 1,
      2007, for the Company. The Company adopted the interpretation in 2007 with
      no
      material impact on its financial condition or results of
      operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
      standard defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement generally applies to fair value
      measurements required under other accounting pronouncements, resulting in a
      consistent definition of fair value across GAAP. This Statement establishes
      a
      fair value hierarchy that distinguishes between (1) market participant
      assumptions developed based on market data obtained from sources independent
      of
      the reporting entity (observable inputs) and (2) the reporting entity’s own
      assumptions about market participant assumptions developed based on the best
      information available in the circumstances (unobservable inputs). This Statement
      expands disclosures about the use of fair value to measure assets and
      liabilities in interim and annual reports. The disclosures focus on the inputs
      used to measure fair value and, for recurring fair value measurements using
      significant unobservable inputs (within Level 3 of the fair value hierarchy),
      the effect of the measurements on earnings for the period. This Statement is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Therefore,
      the
      Statement would be effective for the Company beginning in 2008. The Company
      does
      not expect the adoption of this Statement to have a material impact on its
      financial condition or results of operations.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106 and 132(R).” This Statement requires employers to recognize the
      overfunded or underfunded status of a defined benefit postretirement plan
      (measured as the difference between plan assets at fair value and the benefit
      obligation) as an asset or liability in its statement of financial position
      and
      to recognize changes in that funded status in the year in which the changes
      occur through comprehensive income. This Statement also requires that defined
      benefit plan assets and obligations be measured as of a company’s year-end
      statement of financial position. This Statement also requires disclosures about
      certain effects on net periodic benefit cost for the next fiscal year that
      arise
      from delayed recognition of the gains and losses, prior service costs or
      credits, and transition asset or obligation. The recognition and disclosure
      requirements of this Statement are initially effective for the fiscal year
      ending after December 15, 2006. The requirement to measure plan assets and
      obligations as of the date of the year-end statement of financial position
      is
      effective for fiscal years ending after December 15, 2008. The Company adopted
      the recognition provisions of this Statement on December 31, 2006. The Company
      expects to adopt the measurement date provision of this Statement in 2008.
      The
      Company does not expect the adoption of the measurement date provision of this
      Statement to have a material impact on its financial condition or results of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115.” This Statement permits companies to measure a variety of
      financial instruments and other financial statement items with characteristics
      similar to financial instruments at fair value. The fair value option permits
      a
      company to choose to measure eligible items at fair value at specified election
      dates. Unrealized gains and losses on items for which the fair value option
      has
      been elected are to be recognized in earnings at each subsequent reporting
      date.
      The fair value option (1) may be applied instrument by instrument, with a few
      exceptions, such as investments otherwise accounted for by the equity method,
      (2) is irrevocable (unless a new election date occurs) and (3) is applied only
      to entire instruments and not to portions of instruments. The Statement is
      effective as of the beginning of an entity’s first fiscal year that begins after
      November 15, 2007. Therefore, it would become effective as of January 1, 2008
      for the Company. Early adoption is permitted as of the beginning of a fiscal
      year on or before November 15, 2007, provided the entity also elects to apply
      the provisions of FASB Statement No. 157, “Fair Value Measurements.” The Company
      decided not to adopt SFAS No. 159 early, and does not expect the adoption of
      the
      Statement to have a material impact on its financial condition or results of
      operations.





42




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      1: (Continued)





In
      May
      2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, “Definition of *Settlement* in FASB
      Interpretation No. 48.” This pronouncement clarifies that a tax position can be
      effectively settled upon examination by a taxing authority. Assessing whether
      a
      tax position is effectively settled is a matter of judgment because examinations
      occur in a variety of ways. In determining whether a tax position is effectively
      settled, a company should make the assessment on a position-by-position basis,
      but can conclude that all positions in a particular tax year are effectively
      settled. The provisions of this FSP are to be applied upon the adoption of
      Interpretation No. 48. The Company adopted the Interpretation and this FSP
      on
      January 1, 2007 with no material effect on its financial condition or results
      of
      operations.





In
      June
      2007, the FASB issued Emerging Issues Task Force (EITF) Issue No. 06-11,
“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”
EITF Issue No. 06-11 applies to share-based payment arrangements with dividend
      protection features that entitle employees to receive (a) dividends on
      equity-classified nonvested shares, (b) dividend equivalents on
      equity-classified nonvested share units, or (c) payments equal to the dividends
      paid on the underlying shares while an equity-classified share option is
      outstanding, when those dividends or dividend equivalents are charged to
      retained earnings under SFAS No. 123(R) and result in an income tax deduction
      for the employer. Consensus was reached on accounting for the tax benefits
      of
      the dividend deductions as increases to additional paid-in capital and included
      in the pool of excess benefits available to absorb tax deficiencies on
      share-based payment awards. The consensus is effective prospectively for
      dividends declared in fiscal years beginning after December 15, 2007, making
      it
      effective for the Company on January 1, 2007. The Company does not expect the
      adoption of this Issue to have a material impact on its financial condition
      or
      results of operations.





In
      November 2007, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair
      Value Through Earnings.” This Bulletin supersedes SAB No. 105, “Application of
      Accounting Principles to Loan Commitments” by allowing the future cash flows
      associated with servicing of a loan to be included in the measurement of the
      written loan commitment, which makes the accounting consistent with SFAS No
      156,
“Accounting for Servicing of Financial Assets” and SFAS No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities.” This pronouncement is to
      be applied prospectively to derivative loan commitments issued or modified
      in
      fiscal quarters beginning after December 15, 2007. The Company does not expect
      the adoption of this Bulletin to have a material impact on its financial
      condition or results of operations.





In
      December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used In
      Valuation Methods.” This Bulletin extends the use of the “simplified method” of
      determining the expected lives of stock options granted when determining the
      fair value of the options. The “simplified method” was allowed by SAB No. 107
      until December 31, 2007, at which time companies would be required to use the
      historical option exercise experience of stock-based compensation plans in
      determining the expected lives of stock option grants. This Bulletin allows
      the
      use of the simplified method beyond December 31, 2007 and is effective as of
      January 1, 2008. The Company does not expect the adoption of this Bulletin
      to
      have a material impact on its financial condition or results of
      operations.





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





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





Reclassifications





Certain
      reclassifications have been made to the 2006 and 2005 financial statements
      to be
      consistent with 2007 presentation.





43




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      2: Acquisitions





Alabama
      Bank Acquisition





On
      February 17, 2006, the Company acquired Columbiana Bancshares, Inc. of
      Columbiana, Alabama and its wholly owned subsidiary First National Bank of
      Shelby County. The acquisition executes part of a strategy of the Company to
      expand into Alabama and Tennessee. The attractiveness of the Birmingham and
      surrounding markets compels entrants to pay a premium to gain access to those
      markets, resulting in goodwill related to acquisitions of financial institutions
      with operations based there. The Company paid $31.294 million for all of the
      shares of Columbiana Bancshares. Included in the cash paid was a payment of
      $2.5
      million to an escrow fund to settle contingent claims related to the legacy
      Columbiana Bancshares and First National Bank of Shelby County operations.
      Any
      remaining funds after settlements are paid to the former Columbiana Bancshares
      stockholders. All claims have been settled and the remaining escrow balances
      were disbursed in 2007. Results of operations include the revenues and expenses
      of the acquired operations from the acquisition date forward. The goodwill
      recognized is not deductible for income tax purposes. The core deposit
      intangible asset is being amortized over 16 years.





The
      cost
      of the acquisition and allocation of the purchase price are provided in the
      table below.





*(Dollars
                in thousands)*Cash
                paid to Columbiana Bancshares shareholders
            
            
            
            
            $
            28,525Cash
                paid to contingent obligation escrow on behalf of
                shareholders
            
            
            
            
            
            2,500Direct
                acquisition costs
            
            
            
            
            
            269Total
                cost of acquisition
            
            
            
            
            
            31,294Assets
                acquired at fair value:Cash
                and due from banks
            
            $
            8,394Short-term
                interest-bearing funds
            
            
            10,882Securities
                available for sale
            
            
            42,126Loans,
                net
            
            
            98,413Premises
                and equipment
            
            
            8,625Other
                real estate
            
            
            1,209Bank
                owned life insurance
            
            
            3,991Core
                deposit intangible asset
            
            
            5,889Other
                assets
            
            
            1,722
            
            
            181,251Liabilities
                assumed at fair value:Deposits
            
            
            139,080Other
                borrowings
            
            
            23,014Other
                liabilities
            
            
            1,776
            
            
            163,870Net
                assets acquired
            
            
            
            
            
            17,381Goodwill
            
            
            
            
            $
            13,913





44





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      2: (Continued)





The
      following condensed combined financial information presents results of
      operations of the Company as if the acquisition had taken place on January
      1,
      2005.




*(Dollars
                  in thousands, except per share data)*2006
              
              2005Interest
                  income
              
              $
              93,162
              
              $
              77,376Interest
                  expense
              
              
              40,004
              
              
              28,276Net
                  interest income
              
              
              53,158
              
              
              49,100Provision
                  for loan losses
              
              
              3,661
              
              
              3,146Net
                  interest income after provision for loan losses
              
              
              49,497
              
              
              45,954Noninterest
                  income
              
              
              19,795
              
              
              18,357Noninterest
                  expense
              
              
              51,036
              
              
              47,583Income
                  before income taxes and noncontrolling interests
              
              
              18,256
              
              
              16,728Income
                  taxes
              
              
              5,850
              
              
              5,362Noncontrolling
                  interest in earnings (losses) of subsidiaries
              
              
              10
              
              
              6Net
                  income
              
              $
              12,396
              
              $
              11,360Basic
                  earnings per share
              
              $
              1.37
              
              $
              1.26Diluted
                  earnings per share
              
              $
              1.37
              
              $
              1.26Purchase
                  adjustment and core deposit amortization included in pro forma
                  net income
                  before tax
              
              $
              308
              
              $
              306Estimated
                  financing costs included in pro forma net income before
                  tax
              
              
              1,992
              
              
              1,992Significant
                  nonrecurring expense items of Columbiana Bancshares in interim
                  period:Provision
                  for loan losses
              
              $
              629Data
                  processing contract termination fee
              
              
              576Columbiana
                  investment banking fees
              
              
              249Accelerated
                  amortization of prepaid assets
              
              
              198Impairment
                  of affordable housing investment
              
              
              144Noninterest
                  expense items
              
              $
              1,167Columbiana
                  net loan charge-offs in interim period
              
              $
              803





Tennessee
      Bank Acquisition





On
      May
      12, 2006, the Company acquired Crockett County Bancshares, Inc. of Bells,
      Tennessee and its wholly owned subsidiary Bells Banking Company. The Crockett
      County acquisition allows the Company to branch within Tennessee, a process
      which has resulted in three branch locations in the Memphis metropolitan area.
      The Company paid $7.4 million in cash for all of the shares of Crockett County
      Bancshares and incurred $72 thousand in additional costs that were allocated
      to
      the purchase price paid. The fair value of assets acquired was $31.672 million,
      the fair value of liabilities assumed was $26.511 million and goodwill was
      assigned a value of $2.311 million. A core deposit intangible of $1.171 million
      was recognized and is being amortized over 20 years.





Florida
      Charter Acquisition





On
      July
      17, 2006, the Company announced that it had reached a definitive agreement
      to
      acquire a Florida banking charter and certain other assets and liabilities
      from
      Ameris Bancorp of Moultrie, Georgia. The transaction closed in November 2006.
      The Company used the charter acquisition to locate a new banking facility in
      Crestview, Florida. The Company paid $1.025 million in cash to acquire the
      banking charter.





Agency
      Acquisition





On
      September 26, 2007, the Company paid $46 thousand for the accounts of an
      insurance agency in Kosciusko. The purchase price was allocated to customer
      renewal list intangible assets and is being amortized over 15
      years.




45





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, 2007 and 2006:





Amortized
            
            Gross Unrealized
            
            Fair*(Dollars
                in thousands*)
            
            Cost
            
            Gains
            
            Losses
            
            ValueDecember
                31, 2007:U.S.
                Treasury securities
            
            $
            3,512
            
            $
            22
            
            $
            -
            
            $
            3,534U.S.
                Government sponsored entities
            
            
            69,954
            
            
            250
            
            
            36
            
            
            70,168Mortgage-backed
                investments
            
            
            101,653
            
            
            776
            
            
            315
            
            
            102,114Obligations
                of states and political subdivisions
            
            
            52,329
            
            
            363
            
            
            174
            
            
            52,518Other
            
            
            8,723
            
            
            27
            
            
            371
            
            
            8,379Equity
                securities
            
            
            404
            
            
            21
            
            
            -
            
            
            425$
            236,575
            
            $
            1,459
            
            $
            896
            
            $
            237,138December
                31, 2006:U.S.
                Treasury securities
            
            $
            4,004
            
            $
            -
            
            $
            40
            
            $
            3,964U.S.
                Government sponsored entities
            
            
            111,458
            
            
            29
            
            
            767
            
            
            110,720Mortgage-backed
                investments
            
            
            86,525
            
            
            208
            
            
            802
            
            
            85,931Obligations
                of states and political subdivisions
            
            
            50,938
            
            
            387
            
            
            382
            
            
            50,943Other
            
            
            9,010
            
            
            10
            
            
            55
            
            
            8,965Equity
                securities
            
            
            1,303
            
            
            20
            
            
            18
            
            
            1,305$
            263,238
            
            $
            654
            
            $
            2,064
            
            $
            261,828





Fair
      values are determined primarily from prices obtained from an independent,
      nationally recognized pricing service. These prices include exchange quoted
      prices, dealer quoted prices and prices derived from market yields published
      by
      specialized financial database providers. Mortgage-backed securities trade
      in a
      dealer market, and therefore the prices used are derived from dealer quotes.
      Most non-rated municipal securities and certain corporate securities are not
      actively traded or quoted in a dealer market. These securities are valued using
      the provided market yields in a matrix that incorporates other factors such
      as
      credit standing and tax status. Other securities include certain collateralized
      debt obligations (CDOs) of investment vehicles that hold trust preferred
      securities as collateral. These securities had an amortized cost of $5.026
      million and a market value of $4.675 million at December 31, 2007. These CDOs
      are valued based on dealer quotes, liquidity factors and credit quality
      assumptions about the underlying financial institution trust preferred
      obligors.





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, 2007 and 2006.





*(Dollars
                in thousands)*
            
            Less Than 12 Months
            
            12 Months or More
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesDecember
              31, 2007:U.S.
                Government sponsored entities
            
            $
            4,495
            
            $
            5
            
            $
            26,691
            
            $
            31
            
            $
            31,186
            
            $
            36Mortgage-backed
                investments
            
            
            1,284
            
            
            8
            
            
            22,016
            
            
            307
            
            
            23,300
            
            
            315Obligations
                of states and political subdivisions
            
            
            6,085
            
            
            98
            
            
            10,265
            
            
            76
            
            
            16,350
            
            
            174Other
            
            
            4,675
            
            
            351
            
            
            1,965
            
            
            20
            
            
            6,640
            
            
            371$
            16,539
            
            $
            462
            
            $
            60,937
            
            $
            434
            
            $
            77,476
            
            $
            896December
                31, 2006:U.S.
                Treasury securities
            
            $
            -
            
            $
            -
            
            $
            3,964
            
            $
            40
            
            $
            3,964
            
            $
            40U.S.
                Government sponsored entities
            
            
            37,522
            
            
            150
            
            
            59,450
            
            
            617
            
            
            96,972
            
            
            767Mortgage-backed
                investments
            
            
            11,199
            
            
            125
            
            
            27,698
            
            
            677
            
            
            38,897
            
            
            802Obligations
                of states and political subdivisions
            
            
            1,485
            
            
            150
            
            
            13,769
            
            
            232
            
            
            15,254
            
            
            382Other
            
            
            1,509
            
            
            6
            
            
            2,983
            
            
            49
            
            
            4,492
            
            
            55Equity
                securities
            
            
            -
            
            
            -
            
            
            1,044
            
            
            18
            
            
            1,044
            
            
            18$
            51,715
            
            $
            431
            
            $
            108,908
            
            $
            1,633
            
            $
            160,623
            
            $
            2,064





46





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      3: (Continued)





Management
      believes that the impairments above are temporary and will be recovered over
      the
      investments’ holding periods. The impairments on Government sponsored entities
      (GSE) and mortgage-backed securities are primarily due to interest rate
      fluctuations, as the impaired investments all have AAA credit ratings. The
      mortgage-backed securities are traditional structures that have been minimally
      affected by the lack of liquidity in the sub-prime mortgage markets. Management
      has the ability and intent to hold these securities until their values are
      recovered. At December 31, 2007 there were 19 impaired GSE securities, with
      16
      securities having impairments in excess of 12 months. At December 31, 2007
      there
      were 51 impaired mortgage-backed securities, with 44 securities having
      impairments in excess of 12 months. At December 31, 2007 there were 79 impaired
      municipal securities with 51 securities having impairments in excess of 12
      months. The municipal impairments are primarily related to shifts in the yield
      curve and liquidity premiums being required by market participants. Management
      believes that the municipality obligations will recover by or before their
      maturity dates based on the facts that (1) approximately 50% of the securities
      mature within 5 years, and (2) management knows of no credit-related problems
      regarding any of the issuers. Management has the ability and intent to hold
      these securities until the losses are recovered or their maturity dates. The
      other securities represent 10 impaired investments in corporate debt and debt
      collateralized by trust preferred securities, all of which have Moody’s credit
      ratings of at least A1, have long maturities which exacerbate interest rate
      risk, and which Management intends to hold until the unrealized losses are
      recovered. Of these securities, 4 have been impaired in excess of 12 months.
      There are 6 collateralized debt obligations that have impairments lasting less
      than 12 months. These obligations are secured by commercial bank trust preferred
      securities. The impairments have arisen due to systematic risk related to the
      liquidity crisis in corporate debt. Management has evaluated the credit quality
      of each of these obligations and has determined that the impairments are
      temporary and that the corporate credit markets will stabilize within the next
      24 months. Furthermore, management has the intent and ability to hold the
      securities until their values are recovered or to their maturity
      dates.





The
      amortized cost and fair values of debt securities available for sale at December
      31, 2007, 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
            
            $
            89,496
            
            $
            89,462After
                one through five years
            
            
            30,313
            
            
            30,623After
                five through ten years
            
            
            11,737
            
            
            11,722After
                ten years
            
            
            2,972
            
            
            2,792134,518
            
            
            134,599Mortgage-backed
                investments
            
            
            101,653
            
            
            102,114$
            236,171
            
            $
            236,713





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.





2007
            
            2006Amortized
            
            Fair
            
            Amortized
            
            Fair*(Dollars
                in thousands)*
            
            Cost
            
            Value
            
            Cost
            
            ValuePledged
                to secure public and tax deposits
            
            $
            189,911
            
            $
            190,275
            
            $
            199,134
            
            $
            197,650Pledged
                for the Fed discount window
            
            
            999
            
            
            998
            
            
            994
            
            
            980Pledged
                for other Fed purposes
            
            
            -
            
            
            -
            
            
            2,000
            
            
            1,995Pledged
                for FHLB borrowings
            
            
            15,922
            
            
            16,091
            
            
            20,318
            
            
            20,321Pledged
                for non-public repurchase agreements
            
            
            4,379
            
            
            4,391
            
            
            3,471
            
            
            3,438Pledged
                to an insurance commissioner
            
            
            539
            
            
            561
            
            
            549
            
            
            545Total
                securities pledged
            
            $
            211,750
            
            $
            212,316
            
            $
            226,466
            
            $
            224,929





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





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Gross
                realized gains
            
            $
            2
            
            $
            10
            
            $
            -Gross
                realized losses
            
            
            (39
            )
            
            (14
            )
            
            (24
            )$
            (37
            )
            $
            (4
            )
            $
            (24
            )





47




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





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 $2.350 million and $2.253 million at December 31, 2007 and
      2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Real
                estate loans:Residential
            
            $
            269,601
            
            $
            262,046Construction
                and land development
            
            
            298,879
            
            
            227,532Farmland
            
            
            69,264
            
            
            63,302Nonfarm
                nonresidential real estate
            
            
            363,452
            
            
            331,007Commercial,
                financial and agricultural
            
            
            169,447
            
            
            150,905Consumer
            
            
            40,860
            
            
            45,872Other
            
            
            7,932
            
            
            6,619$
            1,219,435
            
            $
            1,087,283





The
      Bank
      uses real estate loans as collateral for borrowings at the Federal Home Loan
      Banks. Approximately $355.663 million and $374.629 million of real estate loans
      were pledged as collateral for FHLB borrowings at December 31, 2007 and December
      31, 2006.





The
      Bank
      has a “one-time close” construction loan program that provides construction
      financing and a permanent mortgage to individuals. Upon completion of the
      construction, the permanent mortgage is classified as held for sale and sold
      into the secondary market. The Bank transferred approximately $751 thousand
      in
      these loans from construction loans held for investment to mortgages held for
      sale in 2007.





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 collectibility at the time of the transaction. A summary of
      such
      outstanding loans follows:





*(Dollars
                in thousands)*
            
            2007
            
            2006Loans
                outstanding at January 1
            
            $
            8,491
            
            $
            11,259New
                director and executive additions
            
            
            157
            
            
            -New
                loans and advances
            
            
            44,881
            
            
            62,765Repayments
            
            
            (38,060
            )
            
            (65,021
            )Loans
                sold
            
            
            (360
            )
            
            -Retirements
            
            
            (798
            )
            
            (512
            )Loans
                outstanding at December 31
            
            $
            14,311
            
            $
            8,491





The
      following is a summary of nonperforming loans at December 31, 2007 and
      2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Nonaccrual
                loans
            
            $
            6,524
            
            $
            3,557Loans
                past due 90 days or more (based on contractual loan terms) and still
                accruing interest
            
            
            1,093
            
            
            376$
            7,617
            
            $
            3,933





The
      Company accounts for certain distressed loans as impaired loans. Impaired loans
      are discounted, using an allowance, to their present value. The allowance on
      these impaired loans is included in the Company’s allowance for loan losses. In
      2006, the Company improved its definition of impaired loans to more closely
      reflect the definition in FASB Statement No. 114, “Accounting by Creditors for
      Impairment of a Loan.” The value and liquidity of collateral may affect the
      amount of allowance allocated to otherwise impaired loans. The following table
      presents information about the Company’s impaired loans as of and for the years
      ended December 31, 2007 and 2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Impaired
                loans with an allowance
            
            $
            6,101
            
            $
            6,976Impaired
                loans without an allowance
            
            
            2,495
            
            
            2,789Total
                impaired loans
            
            $
            8,596
            
            $
            9,765Allowance
                for impaired loans
            
            $
            1,701
            
            $
            1,902





48




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      4: (Continued)





The
      following table presents information related to income recognized on impaired
      loans for the years ended December 31, 2007, 2006 and 2005.





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Average
                balance of impaired loans
            
            $
            8,605
            
            $
            9,095
            
            $
            2,196Interest
                income recognized on impaired loans
            
            
            660
            
            
            752
            
            
            66





The
      Company accounts for acquired loans for which it is probable that the
      contractual cash flows will not be fully collected in accordance with AICPA
      Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities
      Acquired in a Transfer.” The Company acquired certain of these loans with
      evidence of credit deterioration with the purchase of Columbiana Bancshares
      in
      February 2006. The difference between the contractually required cash flows
      and
      the expected cash flows of an acquired loan is treated as a nonaccretable
      difference. The expected cash flows are discounted at a market rate with the
      resulting premium or discount being earned over the remaining term of the
      expected cash flows.





The
      following table shows information concerning loans acquired with evidence of
      credit deterioration as of December 31, 2007 and 2006.





*(Dollars
                in thousands)*
            
            2007
            
            2006Contractual
                amounts due
            
            $
            381
            
            $
            368Carrying
                value
            
            
            -
            
            
            -





The
      following table summarizes the accretable yield activity.





Accretable
            
            AccretableYield
            
            YieldBalance
                at January 1
            
            $
            -
            
            $
            -Additions
            
            
            -
            
            
            43Accretion
            
            
            -
            
            
            (20
            )Reclassifications
                to nonaccretable difference
            
            
            -
            
            
            2Disposals
            
            
            -
            
            
            (25
            )Balance
                at December 31
            
            $
            -
            
            $
            -





The
      following table summarizes acquisition date information related to loans
      acquired during 2006.





2006Contractually
                required payments due at date of acquisition
            
            $
            1,422Cash
                flows expected to be collected at date of acquisition
            
            
            1,042Amount
                recorded in financial statements at date of acquisition
            
            
            998





During
      2006 the Company recognized a loan loss of $10 thousand on one loan and
      foreclosed on one real estate secured loan in the amount of $954
      thousand.





The
      Company received $117 thousand in 2006 and $2 thousand in 2007 in payments
      on
      the acquired loans.





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





*(Dollars
                in thousands*)
            
            2007
            
            2006
            
            2005Balance
                at January 1
            
            $
            14,950
            
            $
            12,449
            
            $
            11,619Allowances
                of acquired companies
            
            
            -
            
            
            2,234
            
            
            -Loans
                charged off
            
            
            (4,744
            )
            
            (3,825
            )
            
            (3,073
            )Recoveries
            
            
            1,491
            
            
            1,060
            
            
            757Net
                charge-offs
            
            
            (3,253
            )
            
            (2,765
            )
            
            (2,316
            )Provision
                for loan losses
            
            
            2,520
            
            
            3,032
            
            
            3,146Balance
                at December 31
            
            $
            14,217
            
            $
            14,950
            
            $
            12,449





49





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, 2007
      and
      2006:





*(Dollars
                in thousands)*
            
            2007
            
            2006Land
            
            $
            14,426
            
            $
            12,628Buildings
            
            
            35,538
            
            
            31,707Furniture,
                fixtures and equipment
            
            
            23,078
            
            
            21,200Leasehold
                improvements
            
            
            445
            
            
            409Construction
                in progress
            
            
            827
            
            
            1,32874,314
            
            
            67,272Less
                accumulated depreciation and amortization
            
            
            28,769
            
            
            26,144$
            45,545
            
            $
            41,128





Amounts
      charged to operating expenses for depreciation and amortization of bank premises
      and equipment were $2.724 million in 2007, $2.612 million in 2006, and $1.943
      million in 2005.





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





*(Dollars**in
                thousands*)
            
            2007
            
            2006
            
            2005Buildings
                and office space
            
            $
            650
            
            $
            480
            
            $
            358Computer
                equipment
            
            
            777
            
            
            812
            
            
            619Other
                equipment and autos
            
            
            324
            
            
            265
            
            
            1921,751
            
            
            1,557
            
            
            1,169Rental
                income
            
            
            (42
            )
            
            (32
            )
            
            (23
            )Net
                rent expense
            
            $
            1,709
            
            $
            1,525
            
            $
            1,146





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, 2007 are as follows:





*(Dollars**in
                thousands*)2008
            
            $
            1,4012009
            
            
            9522010
            
            
            6052011
            
            
            3122012
            
            
            299After
                2012
            
            
            1,184Total
                minimum lease payments
            
            $
            4,753





Note
      6: Goodwill and Intangible Assets





The
      Company adopted SFAS 142 effective on January 1, 2002. With the adoption of
      SFAS
      142, goodwill and indefinite lived intangible assets are no longer amortized.
      Instead they are reviewed for impairment at least annually or when certain
      indicators are encountered to determine if they should be written down with
      an
      accompanying charge to earnings. Goodwill is tested for impairment during the
      first quarter of each year. No amortization resulted from the impairment tests
      during 2007 and 2006.





Intangible
      assets, such as core deposit intangibles, customer renewal lists and noncompete
      agreements with a determinable useful life continue to be amortized over their
      respective useful lives. Renewal list intangibles have 15 year lives with a
      remaining average life of 8.8 years at December 31, 2007. Noncompete agreement
      intangibles have 15 year lives with a remaining average life of 2.5 years at
      December 31, 2007. Core deposit intangibles have lives of 16 to 20 years with
      a
      remaining average life of 14.8 years at December 31, 2007.





50





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      6: (Continued)





The
      following is a summary of goodwill and intangible assets at December 31,
      2007:





CustomerCore
            
            Renewal
            
            Noncompete
            
            Banking*(Dollars
                in thousands)*
            
            Goodwill
            
            Deposits
            
            Lists
            
            Agreements
            
            CharterBalance
                at January 1, 2006
            
            $
            16,348
            
            $
            -
            
            $
            235
            
            $
            123
            
            $
            -Addition
                due to Columbiana acquisition
            
            
            13,913
            
            
            5,889
            
            
            -
            
            
            -
            
            
            -Addition
                due to Crockett County acquisition
            
            
            2,311
            
            
            1,171
            
            
            -
            
            
            -
            
            
            -Acquisition
                of Florida banking charter
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,025Amortization
                expense
            
            
            -
            
            
            (276
            )
            
            (26
            )
            
            (28
            )
            
            -Balance
                at December 31, 2006
            
            $
            32,572
            
            $
            6,784
            
            $
            209
            
            $
            95
            
            $
            1,025Addition
                due to agency acquisition
            
            
            -
            
            
            -
            
            
            46
            
            
            -
            
            
            -Amortization
                expense
            
            
            -
            
            
            (492
            )
            
            (27
            )
            
            (28
            )
            
            -Balance
                at December 31, 2007
            
            $
            32,572
            
            $
            6,292
            
            $
            228
            
            $
            67
            
            $
            1,025Estimated
                amortization expense2008
            
            
            
            
            $
            427
            
            $
            30
            
            $
            272009
            
            
            
            
            
            427
            
            
            30
            
            
            262010
            
            
            
            
            
            427
            
            
            30
            
            
            142011
            
            
            
            
            
            427
            
            
            30
            
            
            -2012
            
            
            
            
            
            427
            
            
            24
            
            
            -





The
      following tables summarize the gross carrying amounts and accumulated
      amortization balances of amortizing intangible assets as of December 31, 2007
      and 2006.





Gross
            
            
            
            NetCarrying
            
            Accumulated
            
            Carrying*(Dollars
                in thousands*)
            
            Amount
            
            Amortization
            
            AmountDecember
                31, 2007:Customer
                renewal lists
            
            $
            513
            
            $
            285
            
            $
            228Noncompete
                agreements
            
            
            413
            
            
            346
            
            
            67Core
                deposits
            
            
            7,060
            
            
            768
            
            
            6,292$
            7,986
            
            $
            1,399
            
            $
            6,587





December
                31, 2006:Customer
                renewal lists
            
            $
            467
            
            $
            258
            
            $
            209Noncompete
                agreements
            
            
            413
            
            
            318
            
            
            95Core
                deposits
            
            
            7,060
            
            
            276
            
            
            6,784$
            7,940
            
            $
            852
            
            $
            7,088





Amortization
      expense for intangible assets having determinable useful lives amounted to
      $548
      thousand in 2007, $330 thousand in 2006, and $55 thousand in 2005.





The
      Company acquired the book of business of an insurance agency in Kosciusko,
      Mississippi in October 2007 for $46 thousand. The $46 thousand was attributed
      to
      renewal list intangible assets with an estimated life of 15 years.





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 is being
      accounted for as an indefinite-lived intangible asset and is therefore 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, 2007,
      with no amortization being required.




51





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, 2007 and
      2006:





(*Dollars*i*n
                thousands*)
            
            2007
            
            2006Cash
                surrender value of bank owned life insurance
            
            $
            19,829
            
            $
            19,082Federal
                Home Loan Bank stock
            
            
            9,677
            
            
            8,007Deferred
                income tax
            
            
            1,369
            
            
            4,639Investment
                in First M&F Statutory Trust I
            
            
            928
            
            
            928Other
            
            
            9,906
            
            
            5,174$
            41,709
            
            $
            37,830





As
      a
      condition to borrowing funds from the Federal Home Loan Banks (FHLB) of Dallas
      and Atlanta, 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, 2007 and 2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Noninterest-bearing
            
            $
            191,206
            
            $
            180,273Interest-bearing:NOW
                and money market deposits
            
            
            346,431
            
            
            328,360Savings
                deposits
            
            
            105,924
            
            
            94,815Certificates
                of deposit of $100 thousand or more
            
            
            289,533
            
            
            251,291Brokered
                certificates of deposit
            
            
            28,063
            
            
            35,021Other
                certificates of deposit
            
            
            301,298
            
            
            296,222Total
                interest-bearing
            
            
            1,071,249
            
            
            1,005,709Total
                deposits
            
            $
            1,262,455
            
            $
            1,185,982





Interest
      expense on certificates of deposit of $100 thousand or more amounted to $13.210
      million in 2007, $9.368 million in 2006 and $5.026 million in 2005.





At
      December 31, 2007, the scheduled maturities of certificates of deposit are
      as
      follows:





*(Dollars**in
                thousands*)2008
            
            $
            546,9822009
            
            
            40,7552010
            
            
            18,0992011
            
            
            5,9572012
            
            
            7,101After
                2012
            
            
            -$
            618,894





52





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 End2007:Federal
                funds purchased
            
            $
            20,000
            
            $
            6,291
            
            $
            -
            
            
            5.34
            %
            
            -
            %Securities
                sold under agreements to repurchase
            
            
            9,676
            
            
            6,154
            
            
            9,676
            
            
            4.44
            %
            
            3.87
            %$
            29,676
            
            $
            12,445
            
            $
            9,6762006:Federal
                funds purchased
            
            $
            25,000
            
            $
            2,582
            
            $
            12,900
            
            
            5.31
            %
            
            5.44
            %Securities
                sold under agreements to repurchase
            
            
            10,062
            
            
            6,205
            
            
            6,712
            
            
            4.51
            %
            
            4.47
            %$
            35,062
            
            $
            8,787
            
            $
            19,6122005:Federal
                funds purchased
            
            $
            17,400
            
            $
            4,182
            
            $
            -
            
            
            3.77
            %
            
            -
            %Securities
                sold under agreements to repurchase
            
            
            18,062
            
            
            14,874
            
            
            18,062
            
            
            4.16
            %
            
            3.74
            %$
            35,462
            
            $
            19,056
            
            $
            18,062





Federal
      funds purchased represent primarily overnight borrowings through relationships
      with correspondent banks. 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.





Note
      10: Other Borrowings





The
      following is a summary of other borrowings at December 31, 2007 and
      2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Company’s
                line of credit with a correspondent bank in the amount of $15 million,
                maturing in May 2009; secured by approximately 29% of the Bank’s common
                stock; interest payable quarterly at .75% below the lender’s base
                rate
            
            $
            1,917
            
            $
            10,416Bank’s
                advances from Federal Home Loan Banks, net of unamortized purchase
                accounting adjustments of $5 and $131
            
            
            199,084
            
            
            155,984Other
                mortgages to third parties on other real estate
            
            
            311
            
            
            -$
            201,312
            
            $
            166,400Company’s
                junior subordinated debentures, interest payable quarterly at 6.44%
                through March 2011, and payable quarterly at 90-day LIBOR plus 1.33%
                through March 2036; redeemable at par after March 2011
            
            $
            30,928
            
            $
            30,928





The
      Bank
      has advances from the Federal Home Loan Bank (FHLB) of Dallas under Blanket
      Agreements for Advances and Security Agreements. These agreements allow the
      Bank
      to borrow funds from the FHLB to fund mortgage loan programs and to satisfy
      certain other funding needs. The value of mortgage-backed securities and
      mortgage loans pledged under these agreements must be maintained at not less
      than 115% and 150%, respectively, of the advances outstanding. The Bank has
      advances from the FHLB of Atlanta, assumed in the acquisition of Columbiana
      Bancshares in 2006, collateralized by investment securities. The Company’s
      correspondent line of credit contains certain restrictive covenants related
      to
      risk-based capital ratios, allowance for loan loss as a percent of nonperforming
      loans, return on assets, nonperforming loans as a percent of loans and certain
      supervisory actions. The Company was in compliance with all debt covenants
      as of
      December 31, 2007.





53





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.





The
      following is a summary of FHLB advances, net of purchase accounting adjustments,
      at December 31, 2007 and 2006:





*(Dollars
                in thousands*)
            
            2007
            
            2006Single
                payment advances maturing within 12 months of year end:Balance
            
            $
            109,495
            
            $
            25,000Range
                of rates
            
            
            4.28%-5.50
            %
            
            4.82%-5.33
            %Single
                payment advances maturing after 12 months of year end:Balance
            
            $
            60,000
            
            $
            90,869Range
                of rates
            
            
            4.24%-6.50
            %
            
            4.24%-6.50
            %Range
                of maturities
            
            
            2009-2010
            
            
            2008-2012Amortizing
                advances:Balance
            
            $
            29,589
            
            $
            40,115Monthly
                payment amount
            
            
            650
            
            
            1,060Range
                of rates
            
            
            2.17%-8.48
            %
            
            2.17%-8.48
            %Range
                of maturities
            
            
            2008-2020
            
            
            2007-2020





Scheduled
      principal payments on FHLB advances at December 31, 2007, are as
      follows:





*(Dollars
                in thousands*)2008
            
            $
            117,2932009
            
            
            36,8822010
            
            
            34,0882011
            
            
            3,7962012
            
            
            3,566After
                2012
            
            
            3,459$
            199,084





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.





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.





54





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      12: (Continued)





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
      $148 thousand is recognized at December 31, 2007 and a liability of $107
      thousand is recognized at December 31, 2006, 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, 2007 and 2006 follows:





*(Dollars
                in thousands)*
            
            2007
            
            2006Commitments
                to extend credit
            
            $
            230,280
            
            $
            211,780Standby
                letters of credit
            
            
            17,357
            
            
            19,004





At
      December 31, 2007 there were $22.999 million and at December 31, 2006 there
      were
      $4.999 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 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.





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
      $10.822 million at December 31, 2007 and $15.292 million at December 31, 2006.
      These commitments are accounted for as derivatives and marked to fair value
      through mortgage banking income. At December 31, 2007 mortgage
      origination-related derivatives with positive fair values of $26 thousand were
      included in other assets and derivatives with negative fair values of $20
      thousand were included in other liabilities. At December 31, 2006 mortgage
      origination-related derivatives with positive fair values of $23 thousand were
      included in other assets and derivatives with negative fair values of $63
      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, 2007 and 2006 the Company had $3.833 million
      and
      $6.176 million in locked forward sales agreements in place. At December 31,
      2007, forward sale-related derivatives with positive fair values of $3 thousand
      were included in other assets and derivatives with negative fair values of
      $19
      thousand were included in other liabilities. At December 31, 2006 forward
      sale-related derivatives with positive fair values of $23 thousand were included
      in other assets and derivatives with negative fair values of $18 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 $5.120 million
      at December 31, 2007, and $4.175 million at December 31, 2006. The Company
      did
      not have a recourse liability recorded at December 31, 2007 or
      2006.





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
      guarantees the lease payments for its wholly-owned banking subsidiary in one
      data processing lease which expires in September 2008. The remaining payments
      on
      the lease at December 31, 2007 were $236 thousand.





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.





55





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, 2007:Net
                unrealized gain on securities available for sale
            
            $
            563
            
            $
            210
            
            $
            353Net
                unamortized pension costs
            
            
            (1,792
            )
            
            (668
            )
            
            (1,124
            )$
            (1,229
            )
            $
            (458
            )
            $
            (771
            )December
                31, 2006:Net
                unrealized loss on securities available for sale
            
            $
            (1,410
            )
            $
            (526
            )
            $
            (884
            )Net
                unamortized pension costs
            
            
            (2,707
            )
            
            (1,010
            )
            
            (1,697
            )$
            (4,117
            )
            $
            (1,536
            )
            $
            (2,581
            )December
                31, 2005:Net
                unrealized loss on securities available for sale
            
            $
            (1,171
            )
            $
            (437
            )
            $
            (734
            )Minimum
                pension liability
            
            
            (2,950
            )
            
            (1,101
            )
            
            (1,849
            )$
            (4,121
            )
            $
            (1,538
            )
            $
            (2,583
            )





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.





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.





Stock
      Split





On
      May
      15, 2006, the Company completed a 2-for-1 stock split in the form of a 100%
      stock dividend. The record date of the stock split was May 1, 2006. All share
      amounts and prices of prior periods have been adjusted to reflect the effect
      of
      the stock split.





Common
      Stock Repurchase Program





On
      April
      14, 2004, the Company’s Board of Directors authorized a new stock repurchase
      program to repurchase up to 120,000 (not adjusted for split) shares of common
      stock in the open market over a twelve month period beginning on May 1, 2004,
      and ending on April 30, 2005. The authorization limited the number of shares
      to
      be repurchased in any calendar month to no more than 10,000 (not adjusted for
      split).





On
      May
      11, 2005, the Company’s Board of Directors authorized a new stock repurchase
      plan allowing for the purchase of up to 10,000 (not adjusted for split) shares
      per month through May 2006.





On
      December 12, 2007, the Company’s Board of Directors authorized a new 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 are subject to management’s discretion and
      will depend on market considerations. The Board will review the repurchase
      program at the end of 2008 to determine whether to renew the plan for an
      additional twelve month period. The reacquired shares will be held as authorized
      but unissued shares to be used for general corporate purposes.





56





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      15: Stock Compensation Plan





The
      Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised
      2004), “Share-Based Payment”, as of July 1, 2005. SFAS No. 123R requires the use
      of the fair value method of accounting for stock-based compensation. The Company
      adopted the modified prospective method of transition whereby stock-based
      compensation expense is recognized prospectively for all stock-based awards
      that
      were not fully vested as of the date of adoption of the Statement, and for
      all
      awards issued thereafter. 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 following table shows the 2005 effect
      of share-based compensation on certain operating items of adopting SFAS No.
      123R.


Under SFAS No. 123 And*(Dollars
                  in thousands, except share data)*
              
              Under SFAS No. 123R
              
              APB
                  Opinion No. 25
              
              DifferenceNet
                  income before tax
              
              $
              (198
              )
              $
              (188
              )
              $
              (10
              )Net
                  income
              
              
              (123
              )
              
              (117
              )
              
              (6
              )Cash
                  flows from operations
              
              
              38
              
              
              156
              
              
              (118
              )Cash
                  flows from financing activities:Stock
                  options exercised
              
              
              159
              
              
              159
              
              
              -Tax
                  benefits realized
              
              
              118
              
              
              -
              
              
              118Earnings
                  per share effect:Basic
              
              $
              (.03
              )
              $
              (.03
              )
              $
              -Diluted
              
              
              (.03
              )
              
              (.03
              )
              
              -


Through
      June 30, 2005 the Company accounted for its stock-based employee compensation
      plans based on the “intrinsic value method” provided for in Accounting
      Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to
      Employees”, and related interpretations. The Company elected not to adopt the
      recognition provisions of SFAS No. 123, “Accounting for Stock-Based
      Compensation”, as amended by SFAS No. 148, which require a fair-value based
      method of accounting for stock options and similar equity awards. Because the
      exercise price of the Company’s employee stock options equals the market price
      of the underlying stock on the date of grant, no compensation expense was
      recognized on stock option plans. SFAS No. 123, as amended by SFAS No. 148,
      requires pro forma disclosures for net income and earnings per share for
      companies not adopting its fair value accounting method for stock-based employee
      compensation. SFAS No. 123R requires that these disclosures be made for all
      periods for which SFAS No. 123R is not retrospectively applied. The pro forma
      disclosures required by SFAS No. 123 are shown in the table below using the
      fair
      value method of SFAS No. 123R to measure compensation expense for stock-based
      employee plans as if the Company had used the fair value method of accounting.
      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 2007,
      2006
      and 2005: expected dividend yields of 3.00%, 3.25% and 3.25%; expected
      volatility of 19.95%, 20.52% and 22.35%; risk-free interest rates of 4.62%,
      6.50% and 6.50%; and expected lives of 7 years, 7 years and 10 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 $3.91 in 2007, $4.67 in 2006 and $4.88 in 2005.





*(Dollars
                in thousands, except share data*)
            
            2007
            
            2006
            
            2005Net
                income, as reported
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Add:
                Stock option expense recognized, net of taxes
            
            
            12
            
            
            13
            
            
            6Restricted stock award expenses recognized, net of taxes
            
            
            188
            
            
            181
            
            
            54Unrestricted stock award expenses recognized, net of taxes
            
            
            -
            
            
            -
            
            
            63Less:
                    Total stock option expense determined under the fair value method,
                    net of taxes
            
            
            12
            
            
            13
            
            
            12Restricted stock award expenses, net of taxes
            
            
            188
            
            
            181
            
            
            54Unrestricted stock award expenses, net of taxes
            
            
            -
            
            
            -
            
            
            63Net
                income, pro forma
            
            $
            14,458
            
            $
            13,925
            
            $
            12,586Earnings
                per share, as reported:Basic
            
            $
            1.60
            
            $
            1.54
            
            $
            1.40Diluted
            
            
            1.59
            
            
            1.53
            
            
            1.40Earnings
                per share, pro forma:Basic
            
            $
            1.60
            
            $
            1.54
            
            $
            1.40Diluted
            
            
            1.59
            
            
            1.53
            
            
            1.40




57




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      15: (Continued)





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 were 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 number of shares available under the 2005 Equity Incentive Plan
      reflect a 2-for-1 stock split in the form of a 100% dividend effective May
      15,
      2006.





The
      Company adopted Statement of Financial Accounting Standards No. 123R
“Share-Based Payment” on July 1, 2005. The Company is using the modified
      prospective method of transition. In determining the amounts of compensation
      expense to record for unvested stock options as of June 30, 2005 and all
      subsequently issued 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 1999 Stock Option
      Plan.





The
      following is a summary of stock option activity:





WeightedAverageOutstanding
            
            ExerciseOptions
            
            PriceJanuary
                1, 2005
            
            
            252,370
            
            $
            15.08Options
                granted
            
            
            7,000
            
            
            17.00Options
                exercised
            
            
            (12,000
            )
            
            13.28Options
                forfeited
            
            
            (8,000
            )
            
            15.49December
                31, 2005
            
            
            239,370
            
            
            15.20Options
                granted
            
            
            3,000
            
            
            19.06Options
                exercised
            
            
            (55,908
            )
            
            14.12Options
                forfeited
            
            
            -
            
            
            -December
                31, 2006
            
            
            186,462
            
            
            15.59Options
                granted
            
            
            2,000
            
            
            19.00Options
                exercised
            
            
            (19,854
            )
            
            15.37Options
                forfeited
            
            
            (2,000
            )
            
            16.25Options
                cancelled
            
            
            (38,108
            )
            
            13.96December
                31, 2007
            
            
            128,500
            
            $
            16.16





The
      following is a summary of stock options outstanding at December 31,
      2007:





Weighted
            
            Weighted
            
            
            
            WeightedAverage
            
            Average
            
            
            
            AverageRemaining
            
            Exercise
            
            
            
            ExerciseContractual
            
            Price-
            
            
            
            Price-Exercise
            
            Options
            
            Life
            
            Options
            
            Options
            
            OptionsPrice
                Range
            
            Outstanding
            
            (Years)
            
            Outstanding
            
            Exercisable
            
            Exercisable$
                10.00 - $ 10.13
            
            
            5,000
            
            
            2.93
            
            $
            10.05
            
            
            5,000
            
            $
            10.0512.63 - 16.25
            
            
            101,500
            
            
            1.41
            
            
            16.06
            
            
            101,500
            
            
            16.0617.00 - 19.06
            
            
            22,000
            
            
            6.97
            
            
            18.00
            
            
            8,800
            
            
            17.96128,500
            
            
            2.42
            
            $
            16.16
            
            
            115,300
            
            $
            15.94Available
                for additional grant at December 31, 2007
            
            395,000





The
      aggregate intrinsic value of options outstanding at December 31, 2007, was
      $45
      thousand. The aggregate intrinsic value of options exercisable at December
      31,
      2007, was $45 thousand. The total intrinsic value of options exercised during
      2007, 2006 and 2005 was $58 thousand, $257 thousand and $46 thousand,
      respectively.





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.




58




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, 2007 and 2006 there
      were
      $1.423 million and $1.638 million in unrecognized compensation costs. The
      unrecognized costs at December 31, 2007 are expected to be recognized over
      a
      weighted-average period of 3.5 years. The Company estimates that 4.00% (.57%
      annual rate) of the nonvested shares will be forfeited in determining net
      compensation expenses recognized. In March 2007, 3,000 shares of restricted
      stock were forfeited. In December 2007, 1,500 shares of restricted stock with
      a
      fair value of $24 thousand became fully vested and outstanding.





The
      following table summarizes restricted stock awards outstanding at December
      31,
      2007:





Grant Date
            
            Shares Granted
            
            Grant Date Fair Value
            
            Vesting DateAugust
                2005
            
            
            72,000
            
            $
            17.08
            
            
            August
                2012August
                2005
            
            
            1,766
            
            
            17.08
            
            
            August
                2008December
                2005
            
            
            6,000
            
            
            16.86
            
            
            May
                2009December
                2005
            
            
            6,000
            
            
            16.86
            
            
            June
                2011December
                2005
            
            
            25,000
            
            
            16.86
            
            
            December
                2012December
                2006
            
            
            1,500
            
            
            19.59
            
            
            December
                2008December
                2006
            
            
            1,000
            
            
            19.59
            
            
            December
                2009December
                2007
            
            
            13,250
            
            
            15.48
            
            
            December
                2014





The
      following table provides a summary of the restricted stock
      activity:





Grant DateShares
            
            Fair ValueJanuary
                1, 2005
            
            
            -
            
            $
            -Granted
                in 2005
            
            
            113,766
            
            
            17.00December
                31, 2005
            
            
            113,766
            
            
            17.00Granted
                in 2006
            
            
            4,000
            
            
            19.59December
                31, 2006
            
            
            117,766
            
            
            17.09Granted
                in 2007
            
            
            13,250
            
            
            15.48Forfeited
                in 2007
            
            
            (3,000
            )
            
            17.08Vested
                in 2007
            
            
            (1,500
            )
            
            19.59December
                31, 2007
            
            
            126,516
            
            $
            16.89





In
      December 2005, the Company issued 3,000 shares of stock bearing no restrictions
      at a grant date fair value of $33.71 to certain senior and executive officers
      as
      a performance bonus. The Company recognized $101 thousand in compensation
      expense in 2005 related to the unrestricted stock awards.





Note
      16: Other Expenses





Significant
      components of other expenses are summarized as follows:





*(Dollars**in
                thousands*)
            
            2007
            
            2006
            
            2005Postage
                and shipping
            
            $
            831
            
            $
            676
            
            $
            604Stationery
                and supplies
            
            
            1,002
            
            
            1,002
            
            
            866Accounting,
                legal and professional fees
            
            
            922
            
            
            1,427
            
            
            905Insurance
                expense
            
            
            806
            
            
            709
            
            
            650Other
            
            
            5,920
            
            
            6,326
            
            
            4,918$
            9,481
            
            $
            10,140
            
            $
            7,943




59





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
            
            Total2007:Current
            
            $
            4,630
            
            $
            502
            
            $
            5,132Current
                benefits from net operating loss carryforwards
            
            
            (349
            )
            
            -
            
            
            (349
            )Current
                taxes related to noncontrolling interests
            
            
            11
            
            
            2
            
            
            13Deferred
            
            
            1,949
            
            
            243
            
            
            2,192Total
            
            $
            6,241
            
            $
            747
            
            $
            6,9882006:Current
            
            $
            6,075
            
            $
            494
            
            $
            6,569Current
                taxes related to noncontrolling interests
            
            
            5
            
            
            1
            
            
            6Deferred
            
            
            (155
            )
            
            184
            
            
            29Total
            
            $
            5,925
            
            $
            679
            
            $
            6,6042005:Current
            
            $
            5,523
            
            $
            718
            
            $
            6,241Current
                taxes related to noncontrolling interests
            
            
            3
            
            
            1
            
            
            4Deferred
            
            
            (209
            )
            
            (32
            )
            
            (241
            )Total
            
            $
            5,317
            
            $
            687
            
            $
            6,004





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




*(Dollars
                  in thousands)*
              
              2007
              
              2006
              
              2005Amount
                  computed using the Federal statutory rates on income before
                  taxes
              
              $
              7,299
              
              $
              6,978
              
              $
              6,322Increase
                  (decrease) resulting from:Tax
                  exempt income, net of disallowed interest deduction
              
              
              (605
              )
              
              (635
              )
              
              (665
              )State
                  income tax expense, net of Federal effect
              
              
              492
              
              
              447
              
              
              453Life
                  insurance income
              
              
              (234
              )
              
              (198
              )
              
              (146
              )Other,
                  net
              
              
              36
              
              
              12
              
              
              40$
              6,988
              
              $
              6,604
              
              $
              6,004





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, 2007 and
      2006 consist of the following:





*(Dollars
                in thousands)*
            
            2007
            
            2006Allowance
                for loan losses
            
            $
            5,219
            
            $
            5,352Loan
                fees
            
            
            613
            
            
            510Purchase
                accounting adjustments, investments and loans
            
            
            486
            
            
            616Nonperforming
                assets
            
            
            528
            
            
            395Accrued
                expenses
            
            
            239
            
            
            380Share-based
                compensation
            
            
            257
            
            
            151Employee
                benefit plans
            
            
            161
            
            
            103Unrealized
                loss on securities available for sale
            
            
            -
            
            
            526Operating
                loss carryforwards
            
            
            -
            
            
            875Unused
                tax credits
            
            
            -
            
            
            254Other
            
            
            165
            
            
            245Total
                deferred tax assets
            
            
            7,668
            
            
            9,407Fixed
                assets and depreciation
            
            
            (2,221
            )
            
            (1,255
            )Federal
                Home Loan Bank stock dividends
            
            
            (632
            )
            
            (623
            )Intangible
                assets
            
            
            (2,323
            )
            
            (2,487
            )Purchase
                accounting adjustments, deposits and borrowings
            
            
            (12
            )
            
            (68
            )Prepaid
                expenses
            
            
            (430
            )
            
            (254
            )Net
                pension asset and unamortized pension costs
            
            
            (440
            )
            
            (54
            )Unrealized
                gain on securities available for sale
            
            
            (210
            )
            
            -Other
            
            
            (31
            )
            
            (27
            )Total
                deferred tax liabilities
            
            
            (6,299
            )
            
            (4,768
            )$
            1,369
            
            $
            4,639




60





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      17: (Continued)





In
      connection with the Columbiana acquisition, the Company has the following
      remaining net operating losses and tax credits available for carryover for
      Federal income tax purposes at December 31, 2007:





*(Dollars
                in thousands)*
            
            Amount
            
            Expiration DatesNet
                operating loss
            
            $
            716
            
            
            2025Tax
                credits
            
            
            107
            
            
            2025
                - 2026




The
        Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes - An Interpretation of FASB Statement No 109” as of January 31,
        2007 with no adjustment for uncertain tax positions. The Company had no
        recognized uncertain tax positions as of December 31, 2007 and therefore
        has not
        had any tax accruals in 2007 related to uncertain positions.


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 is October 1 of each
      year. The following is a summary of the plan's funded status:





*(Dollars
                in thousands)*
            
            2007
            
            2006Change
                in benefit obligation:Projected
                benefit obligation at beginning of year
            
            $
            8,467
            
            $
            8,933Service
                cost
            
            
            -
            
            
            -Interest
                cost
            
            
            473
            
            
            456Actuarial
                gain
            
            
            (251
            )
            
            (452
            )Benefit
                payments
            
            
            (453
            )
            
            (470
            )Projected
                benefit obligation at end of year
            
            
            8,236
            
            
            8,467Change
                in plan assets:Fair
                value of plan assets at beginning of year
            
            
            8,612
            
            
            7,787Actual
                return on plan assets
            
            
            822
            
            
            564Employer
                contributions
            
            
            400
            
            
            750Refund
                of PBGC premiums
            
            
            64
            
            
            -Benefit
                payments
            
            
            (453
            )
            
            (470
            )Expenses
            
            
            (28
            )
            
            (19
            )Fair
                value of plan assets at end of year
            
            
            9,417
            
            
            8,612Funded
                status at measurement date
            
            $
            1,181
            
            $
            145





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





*(Dollars
                in thousands)*
            
            2007
            
            2006Net
                pension asset
            
            $
            1,181
            
            $
            145Accumulated
                    other comprehensive income, before income
                    taxes
            
            $
            1,792
            
            $
            2,707





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





*(Dollars
                in thousands)*
            
            2007
            
            2006Projected
                benefit obligation
            
            $
            8,236
            
            $
            8,467Accumulated
                benefit obligation
            
            
            8,236
            
            
            8,467Fair
                value of plan assets
            
            
            9,417
            
            
            8,612





61





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      18: (Continued)





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





*(Dollars
                in thousands)*
            
            2007
            
            2006Accrued
                pension benefit cost
            
            $
            -
            
            $
            -Unamortized
                transition asset
            
            
            (18
            )
            
            (27
            )Unamortized
                prior service credit
            
            
            (145
            )
            
            (182
            )Unamortized
                actuarial loss
            
            
            1,955
            
            
            2,916Accumulated
                other comprehensive income
            
            $
            1,792
            
            $
            2,707





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





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Net
                Periodic Benefit Cost:Service
                cost
            
            $
            -
            
            $
            -
            
            $
            -Interest
                cost
            
            
            473
            
            
            456
            
            
            463Expected
                return on plan assets
            
            
            (565
            )
            
            (509
            )
            
            (504
            )Amortization
                of transition asset
            
            
            (9
            )
            
            (9
            )
            
            (9
            )Amortization
                of prior service credit
            
            
            (37
            )
            
            (37
            )
            
            (37
            )Recognized
                actuarial loss
            
            
            417
            
            
            266
            
            
            220Net
                periodic benefit cost
            
            $
            279
            
            $
            167
            
            $
            133Other
                    Changes in Plan Assets and Benefit Obligations Recognized in Other
                    Comprehensive Income:Net
                gain
            
            $
            (544
            )Amortization
                of actuarial net loss
            
            
            (417
            )Amortization
                of transition asset
            
            
            9Amortization
                of prior service credit
            
            
            37Total
                recognized in other comprehensive income
            
            $
            (915
            )Total
                    recognized in net periodic benefit cost and other comprehensive
                    income
            
            $
            (636
            )





The
      Company has 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 has been 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 2008 is $326 thousand. The estimated prior service cost and amortization
      of transition asset that will be amortized from accumulated comprehensive income
      to reduce net periodic pension cost during 2008 are $37 thousand and $9 thousand
      respectively.





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




*(Dollars
                  in thousands)*
              
              2007
              
              2006
              
              2005Net
                  pension cost
              
              $
              279
              
              $
              167
              
              $
              133Payments
                  for expenses made on behalf of the plan
              
              
              32
              
              
              65
              
              
              56Refund
                  of premiums from the PBGC
              
              
              (64
              )
              
              -
              
              
              -$
              247
              
              $
              232
              
              $
              189





The
      following is a summary of weighted average assumptions:





2007
            
            2006
            
            2005Discount
                rate for determining current year’s costs
            
            
            5.75
            %
            
            5.25
            %
            
            5.75
            %Discount
                rate for determining year end benefit obligation
            
            
            5.75
            %
            
            5.75
            %
            
            5.25
            %Expected
                return on plan assets for determining current year’s costs
            
            
            6.75
            %
            
            6.75
            %
            
            7.00
            %Rate
                of compensation increase (plan is frozen)
            
            
            -
            %
            
            -
            %
            
            -
            %




62




FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      18: (Continued)





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 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 9.1% in 2007 and 6.9% in 2006. The mix of invested assets has
      changed over time from predominately fixed-income securities prior to 1997
      to a
      mix of equity securities and fixed-income securities thereafter. The equity
      securities have brought more return volatility and higher expected returns
      to
      the portfolio. Through 2007, Management has operated under the assumption that
      the long-term equity market returns will approximate the past 50 years, which
      provided an average 12.3% 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. Therefore, the assumption
      concerning expected returns for 2007 was maintained at 2006 levels, even though
      rates generally increased during 2006, to reflect the shorter investment
      horizon. The expected return assumption for 2008 is being maintained at the
      same
      level as 2007 and 2006. Management intends to terminate the Plan within the
      next
      7 to 10 years.





The
      plan’s asset allocations at December 31, 2007 and 2006 by asset category are as
      follows:





2007
            
            2006Interest-bearing
                bank balances
            
            
            3
            %
            
            3
            %Debt
                securities
            
            
            33
            %
            
            33
            %Equity
                securities
            
            
            64
            %
            
            64
            %100
            %
            
            100
            %





Equity
      securities included 18,868 shares of the Company’s common stock at December 31,
      2007 and 2006.





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.





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.





63





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      18: (Continued)





Pension
      benefit payments are made from assets of the pension plan. It is anticipated
      that future benefit payments for the plan will be as follows.





*(Dollars
                in thousands)*Year
            
            Expected payments2008
            
            $
            4602009
            
            
            4842010
            
            
            5262011
            
            
            5252012
            
            
            5342013 –
                2017
            
            
            2,845





The
      Company expects to contribute $400 thousand to the pension plan in
      2008.





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 fives years or more of
      credited service. Total matching contributions for this plan were $723 thousand
      in 2007, $561 thousand in 2006 and $369 thousand in 2005. 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 2007, 2006 and 2005.
      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, 2007 and 2006, the profit and savings plan owned 192,958 and
      182,418 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 $106 thousand of
      compensation during 2007 and $135 thousand during 2006. The Company did not
      make
      any profit sharing contributions to the plan in 2007 or 2006. The plan also
      had
      distributions of $5 thousand in 2007 and $2 thousand in 2006. Included in
      salaries and employee benefit expenses are $55 thousand in earnings credits
      to
      employees’ accounts for 2007 and $8 thousand for 2006. Also included in salaries
      and employee benefit expenses are administrative expenses of $5 thousand in
      2007
      and $60 thousand in 2006.





64





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      19: Earnings Per Share





The
      following table shows a reconciliation of earnings per share to diluted earnings
      per share:





*(Dollars
                in thousands, except share data)*
            
            2007
            
            2006
            
            2005Basic
                earnings per share:Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Weighted
                average shares outstanding
            
            
            9,060,137
            
            
            9,016,384
            
            
            8,990,060Basic
                earnings per share
            
            $
            1.60
            
            $
            1.54
            
            $
            1.40Diluted
                earnings per share:Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Weighted
                average shares outstanding
            
            
            9,060,137
            
            
            9,016,384
            
            
            8,990,060Dilutive
                effect of options and restricted stock grants
            
            
            48,980
            
            
            50,944
            
            
            19,142Adjusted
                weighted average shares outstanding
            
            
            9,109,117
            
            
            9,067,328
            
            
            9,009,202Diluted
                earnings per share
            
            $
            1.59
            
            $
            1.53
            
            $
            1.40Stock
                        options not included in adjusted shares due to anti-dilutive
                        effect
            
            
            1,677
            
            
            1,704
            
            
            1,825




Note
      20: Fair Value of Financial Instruments





The
      following table presents the carrying amounts and fair values of the Company’s
      financial instruments at December 31, 2007 and 2006.





2007
            
            2006*(Dollars
                in thousands)*
            
            Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            ValueFinancial
                assets:Cash
                and short-term investments
            
            $
            59,720
            
            $
            59,720
            
            $
            63,483
            
            $
            63,483Securities
                available for sale
            
            
            237,138
            
            
            237,138
            
            
            261,828
            
            
            261,828Loans
                held for sale
            
            
            5,571
            
            
            5,571
            
            
            7,263
            
            
            7,263Loans
                held for investment
            
            
            1,205,218
            
            
            1,206,993
            
            
            1,072,333
            
            
            1,067,828Nonmarketable
                equity investments
            
            
            9,755
            
            
            9,755
            
            
            8,085
            
            
            8,085Investment
                in unconsolidated VIE
            
            
            928
            
            
            928
            
            
            928
            
            
            928Financial
                liabilities:Deposits
            
            
            1,262,455
            
            
            1,262,147
            
            
            1,185,982
            
            
            1,157,512Short-term
                borrowings
            
            
            9,676
            
            
            9,676
            
            
            19,612
            
            
            19,612Other
                borrowings
            
            
            201,312
            
            
            198,427
            
            
            166,400
            
            
            161,024Junior
                subordinated debt
            
            
            30,928
            
            
            31,617
            
            
            30,928
            
            
            31,841Other
                financial instruments:Commitments
                to extend credit
            
            
            (10
            )
            
            644
            
            
            (35
            )
            
            490Letters
                of credit
            
            
            148
            
            
            148
            
            
            107
            
            
            107





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





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





Securities
      available for sale are predominantly valued based on prices obtained from an
      independent nationally recognized pricing service, dealer quotes and market
      yield matrices.





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.





65





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      20: (Continued)





Nonmarketable
      equity securities are primarily securities of the Federal Home Loan Banks for
      which carrying value is estimated to be an accurate approximation of fair
      value.





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.





Deposits
      are valued depending on whether they have defined maturities. The fair value
      of
      demand deposits, NOW accounts, money market accounts and savings deposits is
      the
      carrying amount at the reporting date. The fair value of certificates of deposit
      is estimated by discounting the future cash flows, using current market rates
      for deposits 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.





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





66





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      21: Regulatory Matters





Federal
      banking regulations require that the Bank maintain certain cash reserves based
      on a percent of deposits. This requirement was $1.660 million, which was covered
      by $12.065 million in vault cash, at December 31, 2007. 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 is required to hold a $100 thousand certificate of deposit in a
      commercial bank as a compensating balance for a third party credit card
      originator. The certificate of deposit is 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, 2007, that all
      capital adequacy requirements have been met.





As
      of
      December 31, 2007, 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, 2007
      and 2006, are also presented in the table:





*(Dollars
                in thousands)*
            
            Actual
            
            Minimum Capital
            
            Well CapitalizedAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioDecember
                31, 2007:Total
                capital (to risk weighted assets):Company
            
            $
            147,258
            
            
            10.8
            %
            $
            109,095
            
            
            8.0
            %
            $
            -
            
            
            -Bank
            
            
            146,679
            
            
            10.8
            %
            
            108,998
            
            
            8.0
            %
            
            136,247
            
            
            10.0
            %Tier
                I capital (to risk weighted assets):Company
            
            
            133,031
            
            
            9.8
            %
            
            54,547
            
            
            4.0
            %
            
            -
            
            
            -Bank
            
            
            132,452
            
            
            9.7
            %
            
            54,499
            
            
            4.0
            %
            
            81,748
            
            
            6.0
            %Tier
                I capital (to average assets):Company
            
            
            133,031
            
            
            8.4
            %
            
            63,597
            
            
            4.0
            %
            
            -
            
            
            -Bank
            
            
            132,452
            
            
            8.3
            %
            
            63,521
            
            
            4.0
            %
            
            79,401
            
            
            5.0
            %December
                31, 2006:Total
                capital (to risk weighted assets):Company
            
            $
            137,443
            
            
            11.5
            %
            $
            95,759
            
            
            8.0
            %
            $
            -
            
            
            -Bank
            
            
            145,242
            
            
            12.1
            %
            
            95,623
            
            
            8.0
            %
            
            119,529
            
            
            10.0
            %Tier
                I capital (to risk weighted assets):Company
            
            
            122,493
            
            
            10.2
            %
            
            47,880
            
            
            4.0
            %
            
            -
            
            
            -Bank
            
            
            130,301
            
            
            10.9
            %
            
            47,811
            
            
            4.0
            %
            
            71,717
            
            
            6.0
            %Tier
                I capital (to average assets):Company
            
            
            122,493
            
            
            8.3
            %
            
            59,362
            
            
            4.0
            %
            
            -
            
            
            -Bank
            
            
            130,301
            
            
            8.8
            %
            
            59,286
            
            
            4.0
            %
            
            74,107
            
            
            5.0
            %





Dividends
      paid by the Bank are the primary source of funds available to the Company for
      payment of dividends to its shareholders and other cash needs. Applicable
      Federal and state statutes and regulations impose restrictions on the amounts
      of
      dividends that may be declared by the Bank. The Bank may also be restricted
      in
      its ability to pay dividends due to regulatory violations cited in an
      examination. In addition to the formal statutes and regulations, regulatory
      authorities also consider the adequacy of the Bank's total capital in relation
      to its assets, deposits and other such items, and as a result, capital adequacy
      considerations could further limit the availability of dividends from the Bank.
      These restrictions are not anticipated to have a material effect on the ability
      of the Bank to pay dividends to the Company.





67





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      22: 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)*
            
            2007
            
            2006AssetsCash
            
            $
            309
            
            $
            1,312Investment
                in banking subsidiary
            
            
            169,501
            
            
            165,855Investment
                in statutory trust
            
            
            928
            
            
            928Other
                assets
            
            
            2,279
            
            
            1,390$
            173,017
            
            $
            169,485Liabilities
                and Stockholders’ EquityNote
                payable
            
            $
            1,917
            
            $
            10,417Junior
                subordinated debt
            
            
            30,928
            
            
            30,928Other
                liabilities
            
            
            92
            
            
            93Stockholders’
                equity
            
            
            140,080
            
            
            128,047$
            173,017
            
            $
            169,485




STATEMENTS
      OF INCOME





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Income:Dividends
                received from banking subsidiary
            
            $
            14,500
            
            $
            9,400
            
            $
            9,200Dividends
                received from statutory trust
            
            
            60
            
            
            50
            
            
            -Equity
                in undistributed earnings of banking subsidiary
            
            
            1,432
            
            
            6,059
            
            
            3,624Other
                income
            
            
            2
            
            
            201
            
            
            21Total
                income
            
            
            15,994
            
            
            15,710
            
            
            12,845Expenses:Interest
                on other borrowings
            
            
            229
            
            
            690
            
            
            190Interest
                on junior subordinated debentures
            
            
            1,991
            
            
            1,748
            
            
            -Other
                expenses
            
            
            190
            
            
            257
            
            
            198Total
                expenses
            
            
            2,410
            
            
            2,695
            
            
            388Income
                before income taxes
            
            
            13,584
            
            
            13,015
            
            
            12,457Income
                tax benefit
            
            
            874
            
            
            910
            
            
            135Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592





68





FIRST
      M&F CORPORATION AND SUBSIDIARY


Notes
      to
      Consolidated Financial Statements





Note
      22: (Continued)





STATEMENTS
      OF CASH FLOWS





*(Dollars
                in thousands)*
            
            2007
            
            2006
            
            2005Cash
                flows from operating activities:Net
                income
            
            $
            14,458
            
            $
            13,925
            
            $
            12,592Adjustments
                to reconcile net income to net cash
                provided by operating activities:Equity
                in undistributed earnings of subsidiary
            
            
            (1,432
            )
            
            (6,059
            )
            
            (3,624
            )Other,
                net
            
            
            (975
            )
            
            (1,682
            )
            
            (252
            )Net
                cash provided by operating activities
            
            
            12,051
            
            
            6,184
            
            
            8,716Cash
                flows from investing activities:Investment
                in First M&F Statutory Trust I
            
            
            -
            
            
            (928
            )
            
            -Proceeds
                from sale of nonmarketable equity securities
            
            
            -
            
            
            827
            
            
            -Proceeds
                from sale of land
            
            
            -
            
            
            340
            
            
            -Net
                cash paid in acquisitions
            
            
            -
            
            
            (39,443
            )
            
            -Net
                cash used in investing activities
            
            
            -
            
            
            (39,204
            )
            
            -Cash
                flows from financing activities:Increase
                (decrease) in note payable
            
            
            (8,500
            )
            
            6,614
            
            
            (4,000
            )Issuance
                of junior subordinated debt
            
            
            -
            
            
            30,928
            
            
            -Cash
                dividends
            
            
            (4,772
            )
            
            (4,751
            )
            
            (4,648
            )Common
                shares issued
            
            
            305
            
            
            789
            
            
            159Common
                shares repurchased
            
            
            -
            
            
            -
            
            
            (690
            )Tax
                benefits on stock option transactions
            
            
            87
            
            
            394
            
            
            118Cash
                paid to cancel options
            
            
            (174
            )
            
            -
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            (13,054
            )
            
            33,974
            
            
            (9,061
            )Net
                increase (decrease) in cash
            
            
            (1,003
            )
            
            954
            
            
            (345
            )Cash
                at January 1
            
            
            1,312
            
            
            358
            
            
            703Cash
                at December 31
            
            $
            309
            
            $
            1,312
            
            $
            358





69




FIRST
      M&F CORPORATION AND SUBSIDIARY





**CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS**


**ON
      ACCOUNTING AND FINANCIAL DISCLOSURE**





There
      were no changes in or disagreements with accountants on accounting principles
      and practices, financial statement disclosure, or auditing scope or
      procedure.




**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, 2007 (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
      31 of this Annual Report on Form 10-K and is hereby incorporated by
      reference.





The
      Report of Independent Registered Public Accounting Firm is contained on page
      32
      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, 2007. The Company’s independent registered public accounting firm has also
      reported on the effectiveness of internal control over financial reporting.
      Management’s report and the independent registered public accounting firm’s
      report are included in the section, Financial Statements and Supplementary
      Data
      of this Annual Report on Form 10-K, under the headings “Management’s Annual
      Report on Internal Control Over Financial Reporting” and “Report of Independent
      Registered Public Accounting Firm.”





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.




**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.





70





FIRST
      M&F CORPORATION AND SUBSIDIARY





**EXECUTIVE
      COMPENSATION**




Information
      concerning executive compensation is incorporated by reference and contained
      in
      the proxy material on Page 8 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 5 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 18.




**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
      18.




**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 (on internal
                control)


(c)
            Report
                of Independent Registered Public Accounting
                Firm


(d)
            Consolidated
                Statements of Condition - December 31, 2007 and
                2006


(e)
            Consolidated
                Statements of Income - Years Ended December 31, 2007, 2006 and
                2005


(f)
            Consolidated
                Statements of Comprehensive Income - Years Ended December 31, 2007,
                2006
                and 2005


(g)
            Consolidated
                Statements of Stockholders’ Equity - Years Ended December 31, 2007, 2006
                and 2005


(h)
            Consolidated
                Statements of Cash Flows - Years Ended December 31, 2007, 2006 and
                2005


(i)
            Notes
                to Consolidated Financial
                Statements





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





3
                (A)
            Articles
                of Incorporation, as amended. Filed as Exhibit 3 to the Company's
                Form S-1
                (File No. 33-08751) September 15, 1986, incorporated herein by
                reference.





3
                (B)
            Bylaws,
                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.





10(A)
            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(B)
            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





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
            Rule
                13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer
                and
                Rule 13a-14(a) Certification of John G. Copeland, Chief Financial
                Officer





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





32
            Section
                1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer
                and
                Section 1350 Certification of John G. Copeland, Chief Financial Officer




71




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.
            BY:
            /s/
                John G. CopelandHugh
                S. Potts, Jr.
            
            John
                G. CopelandChairman
                of the Board and
              Chief
                Executive Officer
            
            EVP
                & Chief Financial Officer





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 12, 2008
            Hugh
                S. Potts, Jr., Director/s/
                Scott M. WiggersDATE:
                March 12, 2008
            Scott
                M. Wiggers, Director/s/
                Jeffrey A. CampDATE:
                March 12, 2008
            Jeffrey
                A. Camp, Director/s/
                Hollis C. CheekDATE:
                March 12, 2008
            Hollis
                C. Cheek, Director/s/
                Jon A. CrockerDATE:
                March 12, 2008
            Jon
                A. Crocker, Director/s/
                Toxey Hall, IIIDATE:
                March 12, 2008
            Toxey
                Hall, III, Director/s/
                J. Marlin IveyDATE:
                March 12, 2008
            J.
                Marlin Ivey, Director/s/
                Susan P. McCafferyDATE:
                March 12, 2008
            Susan
                P. McCaffery, Director/s/
                Michael L. NelsonDATE:
                March 12, 2008
            Michael
                L. Nelson, Director/s/
                Otho E. Pettit, Jr.DATE:
                March 12, 2008
            Otho
                E. Pettit, Jr., Director/s/
                Samuel B. PottsDATE:
                March 12, 2008
            Samuel
                B. Potts, Director/s/
                Charles W. Ritter, Jr.DATE:
                March 12, 2008
            Charles
                W. Ritter, Jr., Director/s/
                L. F. Sams, Jr.DATE:
                March 12, 2008
            L.
                F. Sams, Jr., Director





72




FIRST
      M&F CORPORATION AND SUBSIDIARY





Signatures:
      (Continued)




/s/
                  Michael W. SandersDATE:
                  March 12, 2008
              Michael
                  W. Sanders, Director/s/
                  Larry TerrellDATE:
                  March 12, 2008
              Larry
                  Terrell, Director/s/
                  James I. TimsDATE:
                  March 12, 2008
              James
                  I. Tims, Director





**EXHIBIT
      INDEX**





3
                (A)
            Articles
                of Incorporation, as amended. Filed as Exhibit 3 to the Company's
                Form S-1
                (File No. 33-08751) September 15, 1986, incorporated herein by
                reference.





3
                (B)
            Bylaws,
                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.





10(A)
            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(B)
            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





21
            Subsidiaries
                of the Registrant





23
            Consent
                of Independent Registered Public Accounting
                Firm





31
            Rule
                13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer
                and
                Rule 13a-14(a) Certification of John G. Copeland, Chief Financial
                Officer





32
            Section
                1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer
                and
                Section 1350 Certification of John G. Copeland, Chief Financial Officer





73