`UNITED STATES
                                                  SECURITIES AND EXCHANGE COMMISSION
                                                        Washington, 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, 2005
                                                                  or

[  ]                                           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                                                  THE SECURITIES EXCHANGE ACT OF 1934
                                        For the transition period from __________ to __________

                                                   Commission File Number 000-09424

                                                         FIRST M&F CORPORATION
                                                        ------------------------
                                        (Exact name of registrant as specified in its charter)

                            MISSISSIPPI                                                          64-0636653
                         ----------------                                                       ------------
                  (State or other jurisdiction of                                  (I.R.S. Employer Identification Number)
                   Incorporation or organization)

         134 West Washington Street, Kosciusko, Mississippi                                         39090
         --------------------------------------------------                                        -------
              (Address of principal executive offices)                                           (Zip Code)

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

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

                                None                                                                None
                               ------                                                              ------
                       (Title of Each Class)                                     (Name of Each Exchange on Which Registered)

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

                     Common Stock, $5 par value                                                     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.
[   ]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.
[   ]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   [  ] 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.   [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer [   ]                          Accelerated filer  [ X ]                   Non-accelerated filer  [   ]

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

Based on closing sale price for shares on June 30, 2005, the aggregate market value of the voting stock held by non-affiliates of
the Registrant was $112,616,358.

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                                               4,552,542 Shares
                     --------------------------                                               ----------------
                           Title of Class                                          Shares Outstanding at January 31, 2006

                                                  DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement dated March 15, 2006 are incorporated by reference into Part III of the Form 10-K report.`

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`FIRST M&F CORPORATION AND SUBSIDIARY

                                                         CROSS REFERENCE INDEX
                                                                                                                    Page
                                                                                                                   -------
PART I

Item 1          Business
                                                                                                                       3
Item 1A         Risk Factors                                                                                          11
Item 1B         Unresolved Staff Comments                                                                             13
Item 2          Properties                                                                                            13
Item 3          Legal Proceedings                                                                                     13
Item 4          Submission of Matters to a Vote of Security Holders                                                   13

PART II

Item 5          Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
                  Equity Securities                                                                                   14
Item 6          Selected Financial Data                                                                               16
Item 7          Management's Discussion and Analysis of Financial Condition and Results of Operations                 17
Item 7A         Quantitative and Qualitative Disclosures About Market Risk                                            28
Item 8          Financial Statements and Supplementary Data                                                           30
Item 9          Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                  62
Item 9A         Controls and Procedures                                                                               62
Item 9B         Other Information                                                                                     62

PART III

Item 10         Directors and Executive Officers of the Registrant                                                    63
Item 11         Executive Compensation                                                                                63
Item 12         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters        63
Item 13         Certain Relationships and Related Transactions                                                        63
Item 14         Principal Accounting Fees and Services                                                                63

PART IV

Item 15         Exhibits, Financial Statement Schedules                                                               63
--------------

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

---

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 sixth largest bank in the state, having total assets of approximately $1.264
billion at December 31, 2005. 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, Mississippi, and a loan production office in Memphis, Tennessee.

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 1, 2000 the Bank has owned 51% of a joint venture,
Merchants Financial Services, 49% of which is owned by an unaffiliated company.
The joint venture engages in small business accounts receivable factoring, and
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 was inactive at the end of 2005.

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 and Tupelo offices.

As of December 31, 2005,
the Company and its subsidiary employed 472 full-time equivalent employees.

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.

---

In the opinion of First
M&F Corporations management, the Companys most significant
accomplishments during 2005 were as follows:

`Facilities

     o   In December 2004, opened a loan production office in Memphis Tennessee which contributed 20.74% of the Company's loan
         growth for 2005
     o   In September 2005 opened a third full-service branch in Southaven
     o   Currently constructing a new location in Madison which will house a branch facility and several fee-generating services,
         expected to open early in the first quarter of 2006

Revenues

     o   Strong debit card revenue growth in excess of 45% was an encouraging component of deposit revenues
     o   Retail investment brokerage revenues increased by 19.2%
     o   Property, casualty, life and health insurance commissions increased by 3.3% to $3.5 million

Products and Services

     o   Balances in the new eRate Plus account, designed to accommodate only electronic transactions and paying a higher rate of
         interest, more than tripled in 2005
     o   Commercial checking balances grew in excess of 20% in 2005
     o   Completed another successful Gridiron loan campaign, an annual loan promotion offering college season football tickets to
         qualifying loan customers
     o   Loans held for investment grew by 12.08% in 2005
     o   Continued the expansion of the insurance agency network by placing a full-service agent in the Olive Branch banking center


In the opinion of Management, the challenges and opportunities facing the Company going forward from December 31, 2005 are as
follows:

     o   Complete the announced acquisitions in Bells, Tennessee and Columbiana, Alabama in the first quarter of 2006 and
         successfully execute a sales and growth strategy in and around the Memphis and Birmingham markets
     o   Continue branch expansion in economically strong markets
     o   Implement a sales and service initiative in 2006 designed to improve customer satisfaction, improve customer retention,
         and grow market share
     o   Continue to increase the volumes and improve the products and services delivered through the insurance agencies and focus
         on expanding commercial insurance delivery capabilities
     o   Use core deposit growth as the primary funding source for lending activities
     o   Continue to build the retail investment brokerage business by expanding coverage into new banking markets
     o   Refocus efforts on building the treasury services business through expanded offerings and a new sales effort to reach
         north Mississippi and southwest Tennessee businesses
     o   Strengthen consumer lending primarily through  home equity loan promotions
     o   Continue to seek out commercial lending opportunities in economic and industry sectors where we have expertise
     o   Contain expenses in current operations while also focusing on expansion into new locations and markets
     o   Promote low-cost delivery channels such as debit cards and electronic banking that are convenient to the customers`

---

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.

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.

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
percent. 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, 2005, the Company and the Bank were in
compliance with the total capital ratio and the Tier 1 capital ratio
requirements. Note 17 of the Notes to Consolidated Financial Statements presents
the Companys and the Banks capital ratios.

---

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 have an effective
rate ranging from 0 to 27 basis points per $100 of insured deposits, depending
on the institutions capital position and other supervisory factors.
Legislation was enacted in 1996 requiring both SAIF-insured and BIF-insured
deposits to pay a pro rata portion of the interest due on the obligations issued
by the Financing Corporation (FICO). The FDIC is currently
assessing, effective for the first quarter of 2006, BIF- and SAIF-insured
deposits totaling an additional 1.32 basis points per $100 of deposits.

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.

---

`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
------------------------------------------------------------------------------------------------------------------------------------

                                       2005                               2004                              2003
(Dollars in thousands)              Average              Yield/        Average             Yield/        Average             Yield/
                                    Balance   Interest     Cost        Balance   Interest    Cost        Balance   Interest    Cost
                                ------------ ---------- --------    ----------- ---------- -------    ----------- ---------- -------
Interest-bearing bank balances   $    4,717   $    214     4.54%    $    5,747   $     98    1.71%    $    7,451    $   108    1.45%
Federal funds sold                    7,566        194     2.56         11,449        113     .99         16,690        192    1.15
Taxable investments                 139,753      5,797     4.15        131,105      5,439    4.15        152,447      6,653    4.36
Tax-exempt investments               50,314      3,228     6.42         53,500      3,528    6.59         54,980      3,793    6.90
Loans                               893,317     59,521     6.66        805,977     50,515    6.27        734,240     48,904    6.66
                                ------------ ---------- --------    ----------- ---------- -------    ----------- ---------- -------
   Total earning assets           1,095,667     68,954     6.29      1,007,778     59,693    5.92        965,808     59,650    6.18
Nonearning assets                   113,387                            102,411                            96,129
                                ------------                        -----------                       -----------
   Total average assets          $1,209,054                         $1,110,189                        $1,061,937
                                ============                        ===========                       ===========

NOW & MMDA                          330,556      4,618     1.40        280,291      1,913     .68        291,723      2,786     .96
Savings deposits                     84,282      1,523     1.81         86,758      1,180    1.36         90,305      1,434    1.59
Certificates of deposit             394,344     11,587     2.94        359,318      8,643    2.41        345,849      9,179    2.65
Short-term borrowings                19,056        776     4.07         20,839        664    3.19         18,757        608    3.24
Other borrowings                    117,088      4,680     4.00        118,597      4,650    3.92         87,579      3,850    4.40
                                ------------ ---------- --------    ----------- ---------- -------    ----------- ---------- -------
   Total interest-bearing           945,336     23,184     2.45        865,803     17,050    1.97        834,213     17,857    2.14
     liabilities
Noninterest-bearing deposits        140,036                            123,773                           107,493
Noninterest-bearing                   7,959                              8,618                             9,323
     liabilities
Capital                             115,723                            111,995                           110,908
                                ------------                        -----------                       -----------
   Total avg. liabilities &      $1,209,054                         $1,110,189                        $1,061,937
     equity
                                ============ ---------- --------    =========== ---------- -------    =========== ---------- -------
Net interest margin                             45,770     4.18                    42,643    4.23                    41,793    4.33
Less tax equivalent adjustment
   Investments                                   1,204      .11                     1,316     .13                     1,415     .15
   Loans                                            78      .01                        88     .01                        98     .01
                                             ---------- --------                ---------- -------                ---------- -------
Reported book net interest                    $ 44,488     4.06%                 $ 41,239    4.09%                 $ 40,061    4.17%
margin
                                             ========== ========                ========== =======                ========== =======

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

Table 2
------------------------------------------------------------------------------------------------------------------------------------

RATE/VOLUME VARIANCES
------------------------------------------------------------------------------------------------------------------------------------

                                                     005 Compared To 2004                           2004 Compared To 2003
                                       -------------------------------------------    --------------------------------------------
(Dollars in thousands)                            Increase (Decrease) Due To                      Increase (Decrease) Due To
                                       -------------------------------------------    --------------------------------------------
                                                             Yield/                                        Yield/
                                            Volume             Cost           Net         Volume             Cost             Net
                                       ------------    -------------    ----------    -----------    -------------    ------------
Interest earned on:
Interest-bearing bank balances           $    (32)        $     148       $   116       $   (27)        $     17        $    (10)
Federal funds sold                            (69)              150            81           (56)             (23)            (79)
Taxable investments                           358                 -           358          (908)            (306)         (1,214)
Tax-exempt investments                       (207)              (93)         (300)         (100)            (165)           (265)
Loans                                       5,647             3,359         9,006         4,637           (3,026)          1,611
                                       ------------    -------------    ----------    -----------    -------------    ------------
   Total earning assets                     5,369            3,892         9,261          2,539           (2,496)             43

Interest paid on:
NOW & MMDA                                    523            2,182         2,705           (94)             (779)           (873)
Savings deposits                              (39)             382           343           (52)             (202)           (254)
Certificates of deposit                       936            2,008         2,944            341             (877)           (536)
Short-term borrowings                         (65)             177           112             67              (11)             56
Other borrowings                              (60)              90            30          1,290             (490)            800
                                       ------------    -------------    ----------    -----------    -------------    ------------
   Total interest-bearing liabilities       1,758            4,376         6,134            649           (1,456)           (807)
                                       ------------    -------------    ----------    -----------    -------------    ------------
   Change in net interest income
      on a tax-equivalent basis          $  3,611         $   (484)       $3,127        $ 1,890        $  (1,040)       $    850
                                       ============    =============    ==========    ===========    =============    ============

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

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`FIRST M&F CORPORATION AND SUBSIDIARY

Table 3
-------------------------------------------------------------------------------------------------------------------------------

SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------------------------------------------------------------------------------

                                                                                  Carrying Value of Securities
                                                                   ------------------------------------------------------------
(Dollars in thousands)                                                                     December 31
                                                                                       --------------------
                                                                       2005                   2004                    2003
                                                                   -------------       --------------------       -------------
Securities Available For Sale
U. S. Treasury                                                         $  3,963                   $    550            $    560
Government agencies                                                      69,068                     61,796              69,794
Mortgage-backed securities                                               49,504                     47,397              51,526
Obligations of states and political subdivisions                         52,874                     56,089              60,071
Other securities                                                          9,662                      9,822               5,626
                                                                   -------------       --------------------       -------------
Total securities available for sale                                    $185,071                   $175,654            $187,577
                                                                   =============       ====================       =============

                                                                                  Amortized Cost of Securities
                                                                   ------------------------------------------------------------
                                                                                          December 31
                                                                                       --------------------
                                                                       2005                   2004                    2003
                                                                   -------------       --------------------       -------------
Securities Available For Sale
U. S. Treasury                                                         $  3,993                   $    528            $    532
Government agencies                                                      69,888                     61,564              67,954
Mortgage-backed securities                                               50,128                     46,718              49,986
Obligations of states and political subdivisions                         52,549                     54,274              57,503
Other securities                                                          9,684                      9,724               5,400
                                                                   -------------       --------------------       -------------
Total securities available for sale                                    $186,242                   $172,808            $181,375
                                                                   =============       ====================       =============

Table 4
------------------------------------------------------------------------------------------------------------------------------------

MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------------------------------------------------------------------------------

                                                  After One
                             Within              But Within             After Five
(Dollars in thousands)        One                  Five                 But Within               Over
                              Year    Yield        Years     Yield      Ten Years   Yield      Ten Years  Yield     Total    Yield
                            --------- -------    ---------- -------    ----------- -------    ---------- ------  ---------- -------
Securities Available For Sale
U.S. Treasury                $     -       -%     $  3,993    4.14%       $     -       -%      $     -      -%   $  3,993    4.14%
Government agencies           12,997    4.34        56,381    4.18            510    5.66             -      -      69,888    4.22
Mortgage-backed securities    14,521    4.78        30,993    4.84          2,341    4.73         2,273   5.19      50,128    4.83
Obligations of states and
   political subdivisions      8,552    7.00        38,479    6.46          5,290    5.68           228   6.08      52,549    6.47
Other debt securities            551    7.08         7,093    5.27              -       -         1,000   5.47       8,644    5.41
                            --------- -------    ---------- -------    ----------- -------    ---------- ------  ---------- -------
Total securities available
   for sale                  $36,621    5.18%     $136,939    5.03%       $ 8,141    5.41%      $ 3,501   5.33%   $185,202    5.08%
Equity securities                                                                                                    1,040
                                                                                                                 ----------
                                                                                                                  $186,242
                                                                                                                 ==========

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 amortized cost.

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.`

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`FIRST M&F CORPORATION AND SUBSIDIARY

Table 5
------------------------------------------------------------------------------------------------------------------------------------

COMPOSITION OF THE LOAN PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------------

(Dollars in             2005                 2004                  2003                    2002                   2001
thousand)
                      ---------            ----------            ---------               ---------              ----------
                                  % Of                  % Of                 % Of                    % Of                    % Of
Held For Investment    Amount    Total      Amount     Total      Amount     Total        Amount    Total        Amount     Total
                      --------- ---------  ---------- ---------  --------- ----------    --------- ---------    ---------- ---------
Commercial,
   financial and
   agricultural       $151,598     16.25%  $ 128,735     15.46%  $109,558      14.24%    $ 90,332     13.54%     $ 81,822     12.64%
Non-residential real
   Estate              462,819     49.60     369,100     44.34    339,547      44.15      262,141     39.30       234,950     36.29
Residential real
   Estate              274,333     29.40     284,823     34.21    263,450      34.25      241,861     36.26       242,288     37.42
Consumer loans          41,458      4.44      46,677      5.61     53,716       6.98       68,819     10.32        84,171     13.00
Other loans              2,872       .31       3,151       .38      2,885        .38        3,836       .58         4,219       .64
Lease financing              -         -           -         -          -          -            9      0.00            33      0.01
                      --------- ---------  ---------- ---------  --------- ----------    --------- ---------    ---------- ---------
   Total loans        $933,080    100.00%  $ 832,486    100.00%  $769,156     100.00%    $666,999    100.00%     $647,482    100.00%
                      ========= =========  ========== =========  ========= ==========    ========= =========    ========== =========

Loans held for sale   $  5,704             $  12,236             $ 12,165                $ 11,747                $ 13,800
                      ========= =========  ========== =========  ========= ==========    ========= =========    ========== =========


Table 6
------------------------------------------------------------------------------------------------------------------------------------

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

Maturity distribution of loans at December 31, 2005

(Dollars in thousands)                                       Within          One to Five         After Five
                                                            One Year            Years              Years             Total
                                                          --------------    ---------------     -------------     -------------
Commercial, financial and agricultural                         $ 85,462           $ 63,354          $  2,782          $151,598
Non-residential real estate                                     141,415            280,400            41,004           462,819
Residential real estate                                          41,781            174,275            58,277           274,333
Consumer loans                                                   11,068             30,204               186            41,458
Other loans                                                         223                937             1,712             2,872
                                                          --------------    ---------------     -------------     -------------
   Total loans                                                 $279,949           $549,170          $103,961          $933,080
                                                          ==============    ===============     =============     =============

Rate sensitivity of loans at December 31, 2005

                                                            One to Five         After Five
                                                               Years              Years             Total
                                                          --------------    ---------------     -------------
Fixed rate loans                                               $483,603           $ 71,387          $554,990
Floating rate loans                                              65,567             32,574            98,141
                                                          --------------    ---------------     -------------
                                                               $549,170           $103,961          $653,131
                                                          ==============    ===============     =============

Table 7
------------------------------------------------------------------------------------------------------------------------------------

NONPERFORMING ASSETS AND PAST DUE LOANS
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
                                                       2005            2004            2003            2002            2001
                                                   -----------     -----------     ------------    ------------    ------------
Nonaccrual loans                                       $1,403          $3,302           $4,517          $1,582          $1,825
Restructured loans                                          -               -                -               -               -
                                                   -----------     -----------     ------------    ------------    ------------
   Total nonperforming loans                            1,403           3,302            4,517           1,582           1,825
Other real estate owned                                 3,042           3,314            1,282           1,430           1,757
                                                   -----------     -----------     ------------    ------------    ------------
   Total nonperforming assets                           4,445           6,616            5,799           3,012           3,582
Accruing loans past due 90 days or more                   510             645            1,531           2,169           1,958
                                                   -----------     -----------     ------------    ------------    ------------
   Total nonperforming assets and loans                $4,955          $7,261           $7,330          $5,181          $5,540
                                                   ===========     ===========     ============    ============    ============`

---

`FIRST M&F CORPORATION AND SUBSIDIARY

Table 8
------------------------------------------------------------------------------------------------------------------------------------

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
                                                          2005             2004             2003            2002            2001
                                                     -------------     ------------     -----------     -----------     -----------
Balance at beginning of year                             $11,619          $10,891         $10,258         $ 8,426         $ 8,510
Charge offs:
   Commercial, financial and agricultural                 (1,141)          (3,832)           (721)           (650)         (2,313)
   Real estate - nonresidential                             (182)            (312)           (318)           (332)           (301)
   Real estate - residential                                (464)            (289)         (1,120)           (474)           (507)
   Consumer                                               (1,286)          (1,193)         (1,516)         (1,849)         (2,167)
                                                     -------------     ------------     -----------     -----------     -----------
      Total                                               (3,073)          (5,626)         (3,675)         (3,305)         (5,288)
Recoveries:
   Commercial, financial and agricultural                    101              190              85              82              74
   Real estate - nonresidential                               49               24              56              37              20
   Real estate - residential                                 152              445              27               6              50
   Consumer                                                  455              344             338             517             645
                                                     -------------     ------------     -----------     -----------     -----------
      Total                                                  757            1,003             506             642             789
                                                     -------------     ------------     -----------     -----------     -----------
Net charge-offs                                           (2,316)          (4,623)         (3,169)         (2,663)         (4,499)
Provision for loan losses                                  3,146            5,351           3,802           4,495           4,415
                                                     -------------     ------------     -----------     -----------     -----------
Balance at end of year                                   $12,449          $11,619         $10,891         $10,258         $ 8,426
                                                     =============     ============     ===========     ===========     ===========

Net Charge-Offs To Average Loans                            0.26%            0.58%           0.43%           0.40%           0.69%
                                                     =============     ============     ===========     ===========     ===========


Table 9
------------------------------------------------------------------------------------------------------------------------------------

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
------------------------------------------------------------------------------------------------------------------------------------

                                                                                    December 31
                                                       --------------------------------------------------------------------------
(Dollars in thousands)                                     2005             2004            2003           2002           2001
                                                       ------------     ------------    -----------    -----------    -----------
Commercial, financial and agricultural                   $ 5,642          $ 5,224        $ 4,833        $ 3,804         $2,380
Non-residential real estate                                  695              574            317            322            411
Residential real estate                                    1,351            1,241            330          1,048          1,102
Consumer loans                                             4,761            4,581          5,411          5,084          4,532
                                                       ------------     ------------    -----------    -----------    -----------
   Total loans                                           $12,449          $11,619        $10,891        $10,258         $8,426
                                                       ============     ============    ===========    ===========    ===========

Allowance As A Percentage Of Loan Type
                                                                                    December 31
                                                       --------------------------------------------------------------------------
                                                           2005             2004           2003           2002           2001
                                                       ------------     ------------    -----------    -----------    -----------
Commercial, financial and agricultural                      3.65%            3.96%          4.30%          4.04%          2.77%
Non-residential real estate                                 0.15             0.16           0.09           0.12           0.18
Residential real estate                                     0.49             0.44           0.13           0.43           0.45
Consumer loans                                             11.48             9.81          10.07           7.39           5.38
                                                       ------------     ------------    -----------    -----------    -----------
   Total loans                                              1.33%            1.40%          1.42%          1.54%          1.30%
                                                       ============     ============    ===========    ===========    ===========

Net Charge-Offs As A Percent Of Year End Loans Outstanding, By Type
                                                                                    December 31
                                                       --------------------------------------------------------------------------
                                                           2005             2004           2003           2002           2001
                                                       ------------     ------------    -----------    -----------    -----------
Commercial, financial and agricultural                       .67%            2.76%          0.57%           .60%          2.60%
Non-residential real estate                                 0.03             0.08           0.08           0.11           0.12
Residential real estate                                     0.11            (0.05)          0.41           0.19           0.19
Consumer loans                                              2.00             1.82           2.19           1.94           1.81
                                                       ------------     ------------    -----------    -----------    -----------
   Total loans                                              0.25%            0.56%          0.41%          0.40%          0.69%
                                                       ============     ============    ===========    ===========    ===========

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, 2005 (in thousands):

Three months or less                                                                                                  $ 51,621
Over three months through six months                                                                                    26,501
Over six months through twelve months                                                                                   35,799
Over one year                                                                                                           59,453
                                                                                                 ------------------------------
   Total                                                                                                              $173,374
                                                                                                 ==============================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY


Table 11
------------------------------------------------------------------------------------------------------------------------------------

SELECTED RATIOS
------------------------------------------------------------------------------------------------------------------------------------

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

                                                                 2005                     2004                     2003
                                                          ------------------       ------------------       ------------------
Return on average assets                                          1.04%                     .97%                    1.03%
Return on average equity                                         10.88                     9.62                     9.82
Dividend payout ratio                                            36.79                    42.19                    42.37
Average equity to assets ratio                                    9.57                    10.09                    10.44

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 (in
thousands):

                                                                                 2005               2004              2003
                                                                           --------------     -------------     --------------
Securities sold under agreements to repurchase
Outstanding at end of period                                                    $18,062           $16,808            $15,205
Maximum outstanding at any month-end during the period                           18,062            18,872             22,859
Average outstanding during the period                                            14,875            15,428             16,984
Interest paid                                                                       619               557                584
Weighted average rate during each period                                           4.16%             3.61%              3.44%

Federal funds purchased
Outstanding at end of period                                                    $     -           $     -            $     -
Maximum outstanding at any month-end during the period                           17,400            31,900              8,600
Average outstanding during the period                                             4,181             5,411              1,773
Interest paid                                                                       157               107                 24
Weighted average rate during each period                                           3.77%             1.97%              1.36%


                                                            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.

         If the economy deteriorated and real estate values became depressed, the approximately 79% of the Company's loan
         portfolio that is secured by real estate could come under stress, thus possibly requiring additional loan loss accruals.
         The Company may not be able to dispose of its foreclosed real estate at prices above the properties' carrying values,
         thus causing additional losses.

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 may
         cause 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
         could cause the Company's net interest margins to decrease, thereby decreasing net interest revenues.

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 property taxes to increase.`

---

`FIRST M&F CORPORATION AND SUBSIDIARY


The Company is subject to various litigation risks

         Unfavorable judgments in excess of accrued liabilities related to 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 customer's
         ability to generate cash flows, causing loan losses and losses of revenues.
         Unanticipated catastrophic loss claims could occur that would reduce or eliminate the profit sharing revenues of the
         insurance agencies. Such claims may also affect the availability of insurance products for certain classes of customers,
         thereby reducing commission revenues available to the agencies.

The Company is subject to competition from various sources.

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

The projected benefit obligations of the Company's pension plan exceed the fair market value of its assets.

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

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

         The Company's stock is listed and traded on the NASDAQ National Market System. The Company depends on the liquidity of
         the NASDAQ market to raise equity capital. If the market should fail to operate, the Company may be severely constrained
         in raising capital.
         The Company has an analyst following, and therefore, downgrades in the Company's prospects by an analyst may cause the
         Company's stock price to fall and prevent the Company from being able to access the markets for additional capital.

The Company is subject to regulation by various entities.

         The Company is subject to the regulations of the Securities Exchange Commission (SEC), the Federal Reserve Board, the
         Federal Deposit Insurance Corporation, the Mississippi Department of Banking and Consumer Finance, and the Mississippi
         Department of Insurance. New regulations issued by these agencies may adversely affect the Company's ability to carry on
         its business activities.
         The Company is subject to Federal and state laws and regulations such as labor, tax and environmental laws and
         regulations. Changes in these laws and regulations may adversely affect the Company's operations or result in
         unanticipated penalties or other costs.
         The Company is subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board.
         The Company may become subject to accounting rules that adversely affect the reported financial position or results of
         operations of the Company, or that require extraordinary efforts and additional costs to implement.

The Company engages in acquisitions of other businesses.

         The Company has two pending bank acquisitions scheduled for 2006. These acquisitions are expected to be paid in cash and
         therefore the Company will need to secure adequate financing while maintaining its regulatory capital ratios. Downturns
         in the acquired companies could result in insufficient cash flows to repay the financings as scheduled.
         Acquisitions also may result in customer and employee turnover, thus increasing the cost of operating the new businesses.
         Legal contingencies, related to the acquired companies, beyond those that the Company is aware of could arise, causing
         unexpected costs.`

---

The 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 32 of its branch facilities and leases four 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 five years. It is anticipated that all leases will
be renewed.

There has been a trend
toward increased litigation against financial services companies arising out of
consumer lending and other consumer financial transactions, especially in
Mississippi. Some of these actions have resulted in large settlements or
substantial damage awards.

The Bank and one of its
subsidiaries are subject to similar cases that seek substantial damages for
claims arising out of transactions that involve relatively small amounts of
money. While the allegations vary from case to case, in general they allege that
loans were originated or renewed in a way that the borrowers were improperly
sold insurance products, such as credit life insurance. The Company has denied
these allegations and will vigorously defend the claims.

In total, there are cases
involving over 200 plaintiffs that have been filed over a three year period.
Some suits have been filed in Holmes County. It is not possible at this time to
determine the potential exposure related to possible damages in connection with
the remaining suits. Future legislation and court decisions may limit the amount
of damages that can be recovered in legal proceedings such as these. However,
management cannot predict at this time the effect that legislation or court
decisions may have on these cases.

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

No matters were submitted
to a shareholder vote during the fourth quarter of 2005.

---

`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.

At December 31, 2005, there were 1,247 shareholders of record of the Company's common stock.  On December 31, 2005, the Company's
stock closed at $33.71 per share.

The following table summarizes the trading ranges and dividend payouts for the two years ended December 31, 2005.

                                                   Quarterly Closing Common Stock
                                                  Price Ranges and Dividends Paid
                               First                Second                Third                Fourth
----------------------- --------------------- -------------------- --------------------- --------------------
2005:
High                                  $35.95               $35.75                $35.53               $35.28
Low                                    32.25                31.49                 33.08                32.68
Close                                  34.13                34.23                 35.25                33.71
Dividend                                 .25                  .26                   .26                  .26
----------------------- --------------------- -------------------- --------------------- --------------------
2004:
High                                  $39.10               $36.00                $34.00               $34.55
Low                                    30.50                30.65                 31.01                32.65
Close                                  33.51                31.14                 33.35                33.85
Dividend                                 .25                  .25                   .25                  .25


The following table summarizes stock and dividend performance ratios for the five years ended December 31, 2005.

                                                   Stock and Dividend Performance
                                        2005           2004           2003           2002           2001
---------------------------------- -------------- -------------- -------------- -------------- --------------
Price/earnings ratio                    12.04x         14.28x         16.06x         12.50x         13.23x
Price/book value ratio                   1.29x          1.36x          1.56x          1.18x           .95x
Book value/share                        $26.11         $24.96         $24.24         $23.59         $21.68
Dividend payout ratio                    36.79%         42.19%         42.37%         45.05%         64.52%
Historical dividend yield                 3.04%          2.64%          3.60%          4.88%          5.93%


The following table summarizes repurchases of common stock for the program in place during the fourth quarter of 2005:

                                                                                                               Maximum Number
                                                                                      Total Number             (or Approximate
                                                                                        of Shares               Dollar Value)
                                                                                  (or Units) Purchased      of Shares (or Units)
                                   Total Number                                        As Part of              That May Yet Be
                                  of Shares (or          Average Price Paid        Publicly Announced        Purchased Under the
           Period                Units) Purchased       Per Share (or Unit)         Plans or Programs         Plans or Programs
           ------                ----------------       -------------------         -----------------         -----------------
10/01/05 - 10/31/05 (1)                      -                  $     -                          -                    70,000
11/01/05 - 11/30/05                          -                        -                          -                    60,000
12/01/05 - 12/31/05                          -                        -                          -                    50,000

(1)      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.`

---

`FIRST M&F CORPORATION AND SUBSIDIARY

The following table provides information regarding securities issued under our equity compensation plans that were in effect
during 2005.


                                                            Number of
                                                        Securities to be
                                                           Issued Upon           Weighted-Average
                                                           Exercise of           Exercise Price of
                                                           Outstanding              Outstanding            Number of Securities
                                                        Options, Warrants        Options, Warrants          Remaining Available
                                     Plan Name             and Rights               and Rights              for Future Issuance
                                  ----------------     --------------------    ----------------------    --------------------------

Equity compensation plans         1999 Stock                   119,685                  30.4023                        -
approved by security holders      Option Plan
                                  2005 Equity                        -                        -                  290,117
                                  Incentive Plan

Equity compensation plans not     None                               -                        -                        -
approved by security holders
                                                       --------------------    ----------------------    --------------------------

Total                                                          119,685                  30.4023                  290,117
                                                       ====================    ======================    ==========================

In April 2005 the 2005 Equity Incentive Plan was approved by a shareholder vote and replaced the 1999 Stock Option Plan.
In 2005, under the 2005 Equity Incentive Plan, the Company issued to senior and executive officers 56,883 shares of restricted
stock that vest in terms of from three to seven years at a weighted average fair value at the date of grant of $34.01. Also in
2005, under the 2005 Equity Incentive Plan, the Company issued 3,000 shares of unrestricted stock at a grant date fair value of
$33.71 to senior and executive officers.`

---

`FIRST M&F CORPORATION AND SUBSIDIARY

                                                      SELECTED FINANCIAL DATA

(Thousands, except per share data)                  2005             2004             2003             2002             2001
---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------

EARNINGS

Interest income                                 $   67,672       $   58,289       $   58,137       $   62,068       $   70,506
Interest expense                                    23,184           17,050           17,857           23,702           37,355
Net interest income                                 44,488           41,239           40,280           38,366           33,151
Provision for loan losses                            3,146            5,351            3,802            4,495            4,415
Noninterest income                                  16,401           15,169           14,138           13,893           13,597
Noninterest expense                                 39,141           36,994           34,732           33,094           31,750
Income taxes                                         6,004            4,075            4,748            4,247            3,199
Noncontrolling interests                                 6             (787)             244              188              231
Net income                                      $   12,592       $   10,775       $   10,892       $   10,235       $    7,153
Net interest income, taxable equivalent         $   45,770       $   42,643       $   41,793       $   40,007       $   34,939
Cash dividends paid                             $    4,648       $    4,535       $    4,604       $    4,610       $    4,615

PER COMMON SHARE

Net income (basic)                              $     2.80       $     2.37       $     2.36       $     2.22       $     1.55
Cash dividends paid                                   1.03             1.00             1.00             1.00             1.00
Book value                                           26.11            24.96            24.24            23.59            21.68
Closing stock price                                  33.71            33.85            37.90            27.75            20.50

SELECTED AVERAGE BALANCES

Assets                                          $1,209,054       $1,110,189       $1,061,937       $1,023,046       $1,010,122
Earning assets, amortized cost                   1,095,667        1,007,778          965,809          931,817          923,327
Loans held for investment                          884,232          794,010          720,955          652,098          637,315
Investments, amortized cost                        190,067          184,605          207,427          250,687          249,677
Total deposits                                     949,228          850,140          835,370          816,630          800,665
Equity                                             115,723          111,995          110,908          104,954          100,197

SELECTED YEAR-END BALANCES

Assets                                          $1,267,118       $1,142,712       $1,078,298       $1,037,134       $1,018,309
Earning assets, carrying value                   1,130,576        1,029,031          972,402          935,166          917,328
Loans held for investment                          933,080          832,486          769,156          666,999          647,482
Investments, carrying value                        185,071          175,654          187,577          236,110          250,358
Total deposits                                     973,671          877,264          820,226          824,024          816,617
Equity                                             117,377          112,468          110,678          108,210          100,063

SELECTED RATIOS

Return on average assets                              1.04%            .97%             1.03%            1.00%             .71%
Return on average equity                             10.88            9.62              9.82             9.75             7.14
Average equity to average assets                      9.57           10.09             10.44            10.26             9.92
Dividend payout ratio                                36.79           42.19             42.37            45.05            64.52
Price to earnings (x)                                12.04x          14.28x            16.06x           12.50x           13.23x
Price to book (x)                                     1.29            1.36              1.56             1.18              .95`

---

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`

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. Historical loan losses by loan type and loan grade are a significant
factor in estimating future 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. Concentrations of credit by loan type and collateral
type are reviewed to determine exposures and risks of loss. General economic
factors as well as economic factors for individual industries or factors that
would affect certain types of loan collateral are reviewed to determine the
exposure of loans to economic fluctuations. The Company also 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.

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.

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

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

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.

Net income for 2005 was
$12.592 million, or $2.80 basic and $2.79 diluted per share as compared to
$10.775 million, or $2.37 basic and $2.36 diluted per share in 2004 and $10.892
million, or $2.36 basic and $2.35 diluted per share in 2003. Major factors
contributing to the increased earnings were (1) strong loan growth throughout
2005 combined with solid deposit growth in the first quarter of 2005, (2)
improved asset quality that resulted in lower net charge-offs and a lower level
of loan loss accruals than in 2004, (3) solid noninterest revenue growth as
compared to 2004 and (4) a net interest margin decrease of five basis points for
2005 from 2004 as compared to the ten basis point decrease for 2004 from 2003.
The Companys stock buy-back program throughout 2004 and through the first
half of 2005 was another positive contributor to the increased earnings per
share in 2005 over 2004

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 it expects to occupy in the first quarter of 2006. The building
will house a branch facility as well as several fee-generating businesses.

In the first quarter of
2004 the Company completed construction of a branch facility in Flowood in
Rankin County and commenced full-service operations. In the third quarter of
2004 the Company rented a location in Jackson and opened a full-service banking
office. In the fourth quarter of 2004, the Company closed two small,
limited-service branches. The Company also completed construction of a bank
building in Olive Branch in DeSoto County, and moved its operations over from a
rented office location. In the fourth quarter the Company also opened a loan
production office in Memphis, Tennessee with a three-person staff.

In the first quarter of
2003 the Company opened a loan production office in Olive Branch, which
eventually was moved into a newly constructed facility in the fourth quarter of
2004. In the second quarter of 2003 the Company opened a new business,
M&F Business Credit, Inc., in Memphis Tennessee. The business is a
wholly owned subsidiary of M&F Bank and is an asset-based lending
operation with a target market area of the southeastern United States. In the
third quarter of 2003 the Company opened an additional branch in Tupelo, giving
it four (4) locations in the Tupelo market. The location is a former bank
building purchased in 2002 and remodeled in 2003.

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 will minimize the handling of paper documents, lower labor costs,
automate internal processes and improve the Companys preparedness for
future industry migration toward full check image exchange.

---

In the second quarter of
2004 the internet banking product was converted to a new system to accommodate
corporate customer needs and enhance the availability of information to
customers. The core information processing system underwent a significant
upgrade that further streamlined the branch platform processes and enhanced the
information available to customer service representatives for meeting customer
needs. Technology that allows for e-mailing of account statements to customers
was also implemented in the third quarter of 2004.

In November and December of
2003 the mainframe processing system was enhanced with faster equipment as well
as the addition of a storage area network. These additions were made with
expectations for lower ongoing combined lease, maintenance and depreciation
costs.

Total assets increased by
10.89% in 2005, ending the year at $1.267 billion. Total assets increased by
5.97% in 2004, ending the year at $1.143 billion. Total assets increased by
3.97% in 2003 to end the year at $1.078 billion. The compounded annual growth
rate for total assets for the last five (5) years was 4.43%, while the
compounded growth rate for deposits was 4.33%.

The average earning asset
mix for 2005 was 81.53% in loans, 17.35% in investments, and 1.12% in short-term
funds. The average earning asset mix for 2004 was 79.97% in loans, 18.32% in
investments and 1.71% in short-term funds. The average earning asset mix for
2003 was 76.02% in loans, 21.48% in investments, and 2.50% in short-term funds.
Loans held for investment grew by 12.08% in 2005 while deposits grew by 10.99%.
Loans held for investment grew by 8.23% in 2004 while deposits grew by 6.95%.
Loans held for investment grew by 15.32% in 2003 while deposits decreased.
Noninterest-bearing deposits grew by 19.21% in 2005, grew by 11.80% in 2004, and
grew by 20.88% in 2003. Average noninterest-bearing deposits grew by 13.14% in
2005, grew by 15.15% in 2004, and grew by 7.85% in 2003. The following table
shows the volume changes in loans and deposits over the last three years.

`2005         2004          2003
                                                    ------------- ------------ -------------
Net increase in loans                                 $100,594     $ 63,330       $102,157
Net increase in deposits                                96,407       57,038         (3,798)
Ratio of loan growth to deposit growth                  104.34%      111.03%             -`

Loan growth for 2005 was
made up primarily of commercial and real estate loans. Commercial loans grew by
17.76% in 2005 after growing by 17.50% in 2004. The asset-based lending
operation in Memphis, M&F Business Credit, Inc., accounted for 20.51% of
the increase in commercial loans during 2005 and 49.64% of that increase in
2004. Commercial real estate-secured loans grew by 25.39% in 2005 after growing
by 8.70% in 2004 and by 29.53% in 2003. Much of the loan growth occurred in the
stronger economies such as Madison, Rankin and DeSoto Counties and in the
college markets of Oxford and Starkville. The Company maintains strict credit
policies related to collateral and underlying cash flow requirements in making
loans to small businesses. However, the strength of the Madison, Hinds, Lee and
DeSoto County economies has provided growth opportunities for the Company in its
expansion efforts. Consumer loans decreased by 11.18% in 2005, by 13.10% in 2004
and by 21.95% in 2003. Consumer loan growth has been problematic for the Company
since exiting the indirect automobile lending business in 2000. Home equity
loans were flat for 2005 after growing by 8.95% in 2004. 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
Company expects to strengthen its current operations in Madison County with
continued branch expansion efforts. The Company also expects to expand its
lending efforts and physical presence in Memphis, Tennessee and its surrounding
areas as well as in the Birmingham, Alabama market.

---

The Companys
investment portfolio increased by 5.36% in 2005, decreased by 6.36% in 2004 and
decreased by 20.56% in 2003. In 2005 the Company purchased $53.7 million in U.
S. Government agency 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. The Company sold approximately $6.6 million in
mortgage-backed securities in a restructuring transaction during the first
quarter of 2004 and reallocated the proceeds to corporate debt and debt
collateralized by trust preferred securities. The Company purchased
approximately $20.5 million of mortgage-backed securities during 2004,
offsetting the effect of the years monthly principal pay-downs. The 2004
decrease in securities was used primarily for lending purposes, and was provided
equally by calls and maturities of Government agency securities and securities
of municipalities. The 2003 decrease was used to provide funding for the loan
portfolio as well. Most of the cash flows diverted to the 2003 lending effort
were generated from mortgage-backed securities. As of December 31, 2005,
municipal securities represented 28.22% of total debt securities as compared to
31.41% at December 31, 2004 and 31.70% at December 31, 2003. The Company uses
investments in municipal securities for their tax benefits and also to take
advantage of local investment opportunities.

Deposits increased by
10.99% in 2005, increased by 6.95% in 2004 and decreased by .46% in 2003.
Consumer and commercial deposits increased by 11.17% in 2005 and by 4.64% in
2004. Public funds, deposits of states and local municipalities, grew by 10.12%
in 2005 and by 19.78% in 2004. Much of the commercial and consumer deposit
growth occurred in the Madison, Rankin and Hinds County markets as well as in
the Oxford and Tupelo markets. A new deposit acquisition campaign between
February and June 2005, primarily targeting checking and savings deposits,
generated 4,601 new accounts and average new deposit balances of $17.778
million. Much of the public funds growth occurred in the first quarter of 2005
primarily in NOW and MMDA balances with one large relationship providing over
half of that growth. Retail and commercial deposits increased by $81.207 million
during 2005 with certificates of deposit representing $42.661 million of the
growth. 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. The funds
generally move out during the summer months as spending occurs. Public funds
deposits increased by $64.585 million in the first quarter of 2005, and
subsequently decreased by $49.385 million during the last three quarters with
much of that decrease occurring in the fourth quarter. In the NOW account
category, the Company saw its new eRate Plus account, an account designed for
electronic transactions, provide 91.90% of the consumer and commercial deposit
growth in 2005. In noninterest-bearing checking accounts, consumer and
commercial accounts increased by 20.52% in 2005 and by 11.84% in 2004. As
interest rates increased through 2004 and 2005, certificates of deposit became
more attractive. Certificates of deposit grew by 6.87% in 2005 as consumer and
commercial balances increased and public fund balances decreased. The Company
also used special certificate of deposit promotions in 2004 and 2005 to attract
consumer funds. The Company used brokered deposits as an alternative to
borrowings to provide funding for the loan growth that occurred in 2004 and
2005. 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.

---

`FIRST M&F CORPORATION AND SUBSIDIARY

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

                                             December 31, 2005                  December 31, 2004               December 31, 2003
                                       ------------------------            -----------------------          ----------------------
Noninterest-bearing demand                     $ 164,189                           $  137,728                        $  123,191
NOW deposits                                     192,792                              149,572                           131,430
Money market deposits                            115,509                              122,409                           135,067
Savings deposits                                  82,512                               85,342                            86,794
Certificates of deposit                          397,835                              372,262                           343,744
Brokered certificates of deposit                  20,834                                9,951                                 -
                                       ------------------------            -----------------------          ----------------------
   Total                                       $ 973,671                           $  877,264                        $  820,226
                                       ========================            =======================          ======================

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

                                           December 31, 2005                    December 31, 2004               December 31, 2003
                                     ------------------------              -----------------------          ----------------------
Noninterest-bearing demand                     $   4,331                           $   5,089                         $    4,594
NOW deposits                                      84,539                              59,241                             41,665
Money market deposits                             28,772                              21,394                             20,149
Savings deposits                                     241                                 299                                557
Certificates of deposit                           47,137                              64,225                             58,467
Brokered certificates of deposit                     428                                   -                                  -
                                     ------------------------              -----------------------          ----------------------
   Total                                       $ 165,448                           $ 150,248                          $ 125,432
                                     ========================              =======================          ======================`

Other borrowings increased
by 15.29% in 2005 after increasing by 5.58% in 2004 and by 71.53% in 2003. The
Company used other borrowings as a source of liquidity during 2004 and 2005.
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.
Borrowing increases that occurred during 2004 were generally paid off with
deposit growth that occurred during the third and fourth quarters. The increase
in 2003 was used along with investment maturities to fund loan portfolio growth.
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.

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. In 2003 the
Company used low-cost Federal Home Loan Bank borrowings to fund loan growth when
deposit volumes were decreasing. This trend continued to a much lesser extent
during 2004 and again in 2005. The Company has sufficient lines available
through the Federal Home Loan Bank and correspondent banks to meet all
anticipated liquidity needs. However, it is the Companys strategy to
balance the use of deposits and debt as funding sources for asset growth.

The Company announced a
general purpose stock repurchase plan in August of 2002. The Company terminated
the 2002 plan in March of 2003 and replaced it with a 12-month plan to
repurchase up to 240,000 shares through February, 2004. The 2003 plan was
completed on schedule in February, 2004. In April of 2004 the Company announced
a 12-month plan to repurchase up to 120,000 shares through April of 2005. The
2004 plan stipulated that no more than 10,000 shares may be repurchased in a
single calendar month. The 2003 and 2004 plans were authorized to offset the
dilutive effect that stock option issuances were having, and would have, on
reported earnings per share. In May of 2005 the Company announced a stock
repurchase plan for the purchase of up to 10,000 shares per month for a twelve
month period ending in May of 2006. During 2003, the Company issued 147,846
shares related to stock option exercises, at an average price of $26.99 per
share. During 2004, the Company issued 40,721 shares related to stock option
exercises, at an average price of $26.53 per share. During 2005, the Company
issued 6,000 shares related to stock option exercises, at an average price of
$26.56 per share.

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

---

`FIRST M&F CORPORATION AND SUBSIDIARY

The following table shows the stock repurchase activity for 2003 through 2005.

                        2003 Plan                      2004 Plan                   2005 Plan
                    Target of 240,000              Target of 120,000           Target of 120,000                  Totals
                -------------------------    -------------------------    -------------------------    ---------------------------
     Year         Shares       Average         Shares       Average         Shares       Average         Shares         Average
  Purchased      Purchased      Price         Purchased      Price         Purchased      Price         Purchased        Price
------------    ------------  -----------    ------------  -----------    ------------  -----------    ------------    -----------
    2003 (1)      30,000        $ 30.25            -       $       -             -      $       -        30,000          $ 30.25
    2003         135,000          33.29            -               -             -              -       135,000            33.29
    2004          36,500          35.70       60,000           33.41             -              -        96,500            34.27
    2005               -              -       10,000           34.23        10,000          34.74        20,000            34.48
                ------------  -----------    ------------  -----------    ------------  -----------    ------------    -----------
Plan Total       201,500        $ 33.27       70,000         $ 33.53        60,000      $   34.74       281,500          $ 33.39
                ============  ===========    ============  ===========    ============  ===========    ============    ===========

(1) Purchases made in 2003 under the 2002 repurchase plan.`

Purchases of stock outside of the formally announced plans amounted to 4,854 shares at an average price of $31.70 during 2003 and
3,100 shares at an average price of $33.83 during 2004.

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.  The Company embarked on a strategy
over the last four years to increase the rate sensitivity of assets while reducing the sensitivity of liabilities. This was done
by reducing the maturity terms of loans made, match funding certain other long-term loans originated, as well as by purchasing
shorter-maturity securities. The Company also has used long-term CD promotions and FHLB borrowings to increase the average
maturity of the liability portfolio. Beginning in 2002 these initiatives were taken with the anticipation of a rising interest
rate environment. At the end of 2005 the one-year repricing gap stood at + 33.05% as compared to + 20.57% at the end of 2004 and
+ 3.85% at the end of 2003. The increase in the one-year repricing gap from 2003 to 2005 was due primarily to shorter investment
maturities, the reduction of loan maturities and an increase in short-term, floating-rate loans. The Company targets its one year
repricing gap at between + 7.5% and - 7.5%.

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 kept the dividend payout ratio between 35% and 40%, ending 2005
with a 36.79% ratio, ending 2004 with a ratio of 42.19% and ending 2003 with a ratio of 42.37%. The high payout percentage prior
to 2005 was due to the lower than historical earnings per share, as the five-year compounded growth rate for earnings per share
through 2004 was 1.87%. The Company maintained a $1.00 annual dividend rate for 1999 through the first quarter of 2005. The
dividend rate was changed to $1.04 annually during the second quarter of 2005. The ratio of capital to assets stood at 9.26% at
December 31, 2005, 9.84% at December 31, 2004 and 10.26% at December 31, 2003, 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 NASDAQ, also providing an avenue for additional capital if it is needed.

The Company's regulatory capital ratios for 2004 and 2005 are summarized in Note 17 of the audited financial statements included
in Item 8, Financial Statements and Supplementary Data, in this Form 10-K.

---

`FIRST M&F CORPORATION AND SUBSIDIARY

RESULTS OF OPERATIONS

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

                                                                  2005                        2004                        2003
                                                         -------------------        -------------------        ------------------
Net interest margin                                               4.18%                       4.23%                        4.33%
Efficiency ratio                                                 62.96                       63.99                        62.10
Return on assets                                                  1.04                         .97                         1.03
Return on equity                                                 10.88                        9.62                         9.82
Noninterest income to avg. assets                                 1.36                        1.37                         1.33
Noninterest income
  to revenues (1)                                                26.38                       26.24                        25.28
Noninterest expense to avg. assets                                3.24                        3.33                         3.27
Salaries and benefits to total
   noninterest expense                                           58.09                       55.92                        53.19
Contribution margin (2)                                          63.43                       64.22                        66.97
Nonperforming loans to loans                                       .20                         .47                          .77
Net charge-offs as a percent of average loans                      .26                         .58                          .43

(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:

(Amounts in thousands)                                           2005                        2004                         2003
                                                        ---------------------     ----------------------      --------------------
Mortgage originations                                        $   57,691                  $   61,632                    $   75,051
Commissions from annuity sales                                      324                         401                           228
Trust and retail investment revenues                                484                         433                           310
Revenues per FTE employee                                           133                         128                           132
Agency commissions per agency
   FTE employee (1)                                                  79                          76                            76
(1) Agency commissions are property, casualty, life and health commissions produced by the insurance agency personnel.`

Net interest income was
$44.488 million in 2005 as compared to $41.239 million in 2004 and $40.280
million in 2003. The 2005 improvement was the result of growth in average loans
of 10.84% over 2004 and an increase in tax-equivalent loan yields to 6.66% from
6.27% in 2004. Deposit costs increased to 2.19% in 2005 from 1.62% in 2004. The
improvement in loan yields resulted from the general increase in interest rates
during 2004 and 2005, but more importantly, floating rate loans outstanding
increased by 22.90% during 2005. Loans have continued to grow as a component of
earning assets as the percentage of average loans to average earning assets
increased to 81.53% in 2005 from 79.98% in 2004 and 76.02% in 2003. The impact
of loan volumes and yields offset the negative effect of the increased total
cost of funds, which moved from 1.97% in 2004 to 2.45% in 2005. Although the
cost of funds increased by 48 basis points, the net interest margin decreased
only five basis points to 4.18% in 2005. The 2004 improvement was the result of
decreases due to the decrease in net interest spreads from 4.04% in 2003 to
3.95% in 2004, offset by increases due to a 9.77% increase in average loan
balances from 2003 to 2004. Another factor that reduced the negative impact of
falling asset yields from 2002 to 2004 was the growth in noninterest-bearing
deposits. Average noninterest-bearing deposits represented 12.51% of total
funding during 2004 as compared to 11.41% during 2003. Earning asset yields
decreased by 26 basis points from 2003 to 2004 while funding costs decreased by
17 basis points. The margin improvement in 2003 was due to increased loan
volumes and decreased costs of deposits and borrowings. Average loans
outstanding increased from $663.503 million in 2002 to $734.240 million in 2003.
Interest and fees on loans decreased from 2002 to 2003 due to decreasing rates,
as loan yields fell from 7.33% in 2002 to 6.66% in 2003. Interest expense
decreased from 2002 to 2003 as liability costs decreased to 2.14% in 2003 from
2.93% in 2002. Competition for loans kept new loan yields from increasing as
quickly as general interest rates did in 2004. However, economic growth in 2005
resulted in a growing demand for loans, easing some of the competitive pricing
pressures. There was also a delayed reaction of floating rate loan repricing as
compared to changes in the prime rate due to the volume of loans that had
contractual floor rates that were above the 2004 prime rates, and therefore did
not reprice until late in 2004 and into 2005.

---

During 2005 the
Companys provision decreased to $3.146 million after increasing to $5.351
million in 2004 from $3.802 million in 2003. The reduced accruals in 2005 were
the result of improved credit quality as the ratio of net charge-offs to average
loans fell to .26% from .58% in 2004. Nonperforming loans as a percentage of
total loans also decreased to .20% at the end of 2005 from .47% at the end of
2004. Approximately $3.131 million of the 2004 loan loss accruals related to
Merchants Financial Services Group (MFS), of which the Company is a 51% owner.
MFS, an accounts receivable factoring company, incurred the losses primarily in
one account. MFS sold substantially all of its accounts receivable to its two
owners at the end of 2004. The Company received approximately $2.020 million in
receivables in the transfer. Loans past due for over 90 days received in the
transfer amounted to $311 thousand. Net charge-offs for 2004 were $4.623
million, which included $3.283 million of losses at MFS. Net charge-offs were
$3.169 million in 2003 as compared to $2.663 million in 2002. Net charge-offs as
a percentage of average loans were .58% in 2004 and .43% in 2003. The strategy
of the Company is to maintain credit quality at levels that produce net
charge-off percentages in the .30% to .35% range. The net charge-off percentage
in 2004 would have been .17%, excluding the loss at MFS. The net charge-off
percentage for 2003 would have been .36%, excluding one large write-down on some
rental properties in Lee County. Nonaccrual loans as a percentage of total loans
were .15% at the end of 2005, .39% at the end of 2004, and .58% at the end of
2003. The nonaccrual loan totals for 2003 included non-accruing loans on rental
properties mentioned above of approximately $1.890 million. Management maintains
a conservative approach to classifying loans internally for purposes of
determining needed loan loss allowances. The percentage of allowance for loan
loss to total loans held for investment was 1.33% at December 31, 2005, 1.40% at
December 31, 2004, and 1.42% at December 31, 2003.

Noninterest income
increased by 8.12% in 2005, by 7.29% in 2004 and by 1.76% in 2003. Deposit
income increased by 12.33% after increasing by 0.23% in 2004, and increasing by
2.17% in 2003. The 2005 improvement was due to growth in overdraft fee revenues
of 14.68% over 2004 and growth in debit card revenues of 46.71% over 2004. The
lack of growth in deposit revenues in 2003 and 2004 was due mainly to lower
insufficient check volumes than in 2002. The number of checking accounts with
balances of less than $100 thousand increased by 2.84% in 2004 after increasing
by 1.10% in 2003, contributing to the lack of growth in deposit account service
charges from 2002 to 2004. Debit card revenues more than doubled in 2004,
partially offsetting the decrease in other deposit revenues. Mortgage banking
income increased by 2.24% in 2005 after decreasing by 14.77% in 2004 and
increasing by 7.18% in 2003. Rising interest rates during 2004 and 2005 reduced
the activity resulting from mortgage refinancings. The low interest rate
environment in 2002 and much of 2003 was the main contributing factor to the
increased originations in 2003. However, the presence of mortgage originators in
economically strong markets such as Madison, DeSoto, Rankin and Lee counties
helps to maintain origination volumes. Agency commissions continued to grow in
2005 as in 2004 and 2003 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 19.13%
in 2005, grew by 75.97% in 2004 and fell by 11.41% in 2003. Property, casualty,
life and health commissions increased by 3.31% in 2005, by 4.65% in 2004 and by
7.88% in 2003. Pricing in the property and casualty industry became more
competitive in 2004 and 2005 after having been high in 2003 and 2002. Trust and
brokerage income increased by 11.78% in 2005, by 39.68% in 2004 and by 65.78% in
2003. The Company has committed to building the Trust and retail investment
businesses and added an additional licensed broker to the retail investment
staff in 2004. Trust and wealth management services, as well as retail
investment brokerage services have become more significant contributors to the
Companys revenues in 2004 and 2005. Other areas such as treasury
management services and electronic banking are not yet significant contributors
to the Companys overall revenues. However, management continues to focus
on building these businesses and revenue streams as an important strategic
objective for the future. Items in other income for 2005 were loan and letter of
credit fees of $439 thousand, net gains on sales of loans of $231 thousand,
insurance agency profit sharing revenues of $471 thousand, rental revenues on
foreclosed properties of $106 thousand and revenue from the receipt of $128
thousand paid to members of the PULSE network upon its acquisition by the
Discover Financial Services network. An item reducing other income in 2005 was
$614 thousand in losses on disposals of foreclosed properties. Increases in
other income for 2004 over 2003 were the result of insurance agency contingency
revenues of $286 thousand, revenues from the sale of timber on undeveloped
properties of $123 thousand, rental revenues on foreclosed property of $92
thousand, and loan and letter of credit fees of $285 thousand.

---

Salary and benefit expenses
increased by 9.91% in 2005 after increasing by 11.99% in 2004 and increasing by
3.73% in 2003. The number of full-time equivalent employees was 472.0 at the end
of 2005, 458.5 at the end of 2004 and 436.0 at the end of 2003. New branch
locations and new services required additions of 14 full time equivalent
employees in 2005 and 19 in 2004 as compared to 10 in 2003. The mortgage
department reduced staffing in 2005 to match decreasing volumes. Health care
related costs increased by 17.47% in 2005 after increasing by 57.52% in 2004.
The 2004 expense included extraordinary claims. The 2005 expense reflects
primarily the increasing cost of health care as well as the increasing number of
employees covered by the plan.

The Company expects to add
producers as it expands in current markets and moves into future new markets and
businesses. However, the Company also expects that the contributions, as can be
measured by the contribution margins, will increase as the new associates
produce earning assets and fee revenues.

Occupancy expenses
increased by 10.42% in 2005 and 8.22% in 2004, reflecting the costs of branch
expansion efforts during 2003 through 2005.

Marketing and business
development expenses were down in 2005 after trending up in 2004 as compared to
2003. Several marketing campaigns during 2004, grand opening and branch
promotion expenses, and new sponsorships all contributed to the 27.90% increase
in marketing costs in 2004. During 2005 there were less external advertising
campaigns and more in-branch promotion efforts. Also, ticket costs for the
Gridiron summer loan campaign were limited during 2005 and replaced with other
promotional incentives.

ATM and debit card network
and processing expenses increased by 25.75% due to volume increases after
leveling off in 2004 and increasing by $358 thousand in 2003. The 2003 increase
resulted from a change in debit card providers and upgrades in the debit card
product.

There was no impairment
recognized as a result of the goodwill impairment tests performed by the Company
in 2003 through 2005. The Company is required to test its goodwill intangible
asset annually for impairment.

The Companys
effective tax rate was 32.28% in 2005 as compared to 28.98% in 2004, and 29.89%
in 2003. The 2005 increase was due to an increase in pre-tax earnings of 32.28%,
the lessening effect on pre-tax earnings of tax-exempt revenues from municipal
investments, and the effect of the $2.522 million loss of MFS, resulting in tax
benefits in 2004. The Company primarily uses tax-exempt securities and loans to
provide tax benefits and does not use any exotic tax-shelter vehicles. The
Company paid $130 thousand in Federal tax assessments and $11 thousand in
Mississippi tax assessments in 2004. The Federal assessment was related to the
audit of the final 1999 returns of Community Federal Bancorp, which was acquired
by the Company in November, 1999.

The $787 thousand negative
balance in noncontrolling subsidiary losses for 2004 is the amount of losses,
net of tax benefits of $469 thousand, primarily the result of a $2.0 million
loan loss, attributable to the other minority owner in the Merchants Financial
Services (MFS) factoring business. The business was substantially curtailed by
the end of 2004, with all performing receivables being sold to the owners of
MFS.

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`FIRST M&F CORPORATION AND SUBSIDIARY

Quarterly Financial Trends

The following table summarizes components of the Company's statements of income by quarter for 2005 and 2004.


                                                            2005
                                   -------------------------------------------------------   4th Qtr 05
                                      First         Second          Third       Fourth           Vs
(Dollars in Thousands)               Quarter        Quarter        Quarter      Quarter      4th Qtr 04
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Interest income                       $ 15,565         $ 16,390     $ 17,231     $ 18,486      20.78%
Interest expense                         4,888            5,455        6,130        6,711      44.29
Net interest income                     10,677           10,935       11,101       11,775      10.51
Provision for loan losses                  871              818          767          690     (45.75)
Noninterest income                       4,105            4,015        4,466        3,815       4.32
Noninterest expense                      9,209            9,638        9,924       10,370       7.55
Income taxes                             1,505            1,446        1,588        1,465      59.41
Noncontrolling interest                     (1)               3            4            -          -
Net income                            $  3,198         $  3,045     $  3,284     $  3,065      16.10%
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Per common share:
     Net income (basic)               $    .71         $    .68     $    .73     $    .68      17.24%
     Net income (diluted)             $    .71         $    .67     $    .73     $    .68      17.24%
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
     Cash dividends                        .25              .26          .26          .26       4.00
---------------------------------- ------------ ---------------- ------------ ------------ ---------------

                                                            2004
                                   -------------------------------------------------------   4th Qtr 04
                                      First         Second          Third       Fourth           Vs
                                     Quarter        Quarter        Quarter      Quarter      4th Qtr 03
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Interest income                       $ 14,305         $ 14,122     $ 14,556     $ 15,306       2.93%
Interest expense                         4,036            4,107        4,256        4,651       5.58
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Net interest income                     10,269           10,015       10,300       10,655       1.82
Provision for loan losses                2,460              999          620        1,272      32.50
Noninterest income                       3,977            3,685        3,850        3,657       4.22
Noninterest expense                      8,977            8,890        9,485        9,642       8.94
Income taxes                               768            1,155        1,233          919     (28.15)
Noncontrolling interest                   (560)             (97)          31         (161)   (314.67)
Net income                            $  2,601         $  2,753     $  2,781     $  2,640      (6.02%)
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Per common share:
     Net income (basic)               $    .57         $    .60     $    .62     $    .58      (4.92%)
     Net income (diluted)             $    .57         $    .60     $    .61     $    .58      (4.92%)
---------------------------------- ------------ ---------------- ------------ ------------ ---------------
     Cash dividends                        .25              .25          .25          .25          -
---------------------------------- ------------ ---------------- ------------ ------------ ---------------`

The Company measures and
monitors credit quality on an ongoing basis through credit committees and the
loan review process. Management reviews loan quality on a monthly basis.
Classified and past due loans are monitored to determine if deterioration is
occurring and if corrective actions need to be taken. Credit standards are
approved by the Board with their adherence monitored during the lending process
as well as through subsequent loan reviews. The Company has an internal
Officers Loan Committee which reviews certain proposed large extensions
and renewals of credit. Those credits that are approved within the
Committees limits may be funded. Larger credit requests that the Committee
approves are forwarded to the Board Loan Committee for a final approval or
denial. The Board has authorized a Loan Committee which meets weekly to review
potential large extensions and renewals of credit. The Loan Committee must
approve those credits before they can be funded. The Company strives to minimize
risk through the diversification of the portfolio geographically within
Mississippi as well as by loan purpose and collateral.

The Banks credit
standards are enforced within the Bank as well as within all of its wholly-owned
subsidiaries. As of March, 2004, management began to enforce the Banks
credit standards on the Banks partially-owned joint venture as well.
Management will enforce its credit standards as well as other quality and
internal control standards on future business ventures in which it is a partner.

The adequacy of the
allowance for loan losses is monitored quarterly with provision accruals
approved by the Board. Allowance adequacy is dependent on loan classifications
by external examiners as well as by internal loan review personnel, past due
loans, collateral reviews, loan growth and loss history. The allowance as a
percentage of loans at December 31, 2005 is comparable to other peer banks.

---

`FIRST M&F CORPORATION AND SUBSIDIARY

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

(Amounts in thousands)
                                                                                          December 31
                                                              -------------------- -- -------------------- -- --------------------
                                                                     2005                    2004                    2003
                                                              --------------------    --------------------    --------------------
Nonaccrual loans                                                 $   1,403               $   3,302               $   4,517
Past due 90 days or more and still
   accruing interest                                                   510                     645                   1,531
                                                              --------------------    --------------------    --------------------
Total nonperforming loans                                            1,913                   3,947                   6,048
Other real estate                                                    3,042                   3,314                   1,282
                                                              --------------------    --------------------    --------------------

Total nonperforming assets                                       $   4,955               $   7,261               $   7,330
                                                              ====================    ====================    ====================

Ratios:
Nonperforming loans to loans                                          .20%                    .47%                    .77%
Nonperforming assets to assets                                        .39%                    .64%                    .68%
                                                              ====================    ====================    ====================`

The Companys primary
off-balance sheet arrangements are in the form of loan commitments and operating
lease commitments. At December 31, 2005 the Company had $179.514 million in
unused loan commitments outstanding. Of these commitments, $97.964 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
issued 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 $84 thousand in commercial letters of credit outstanding
at December 31, 2005. At December 31, 2005 the Company had $29.443 million in
financial standby letters of credit issued and outstanding.

A liability of $181
thousand is recognized in other liabilities at December 31, 2005 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 $12.229 million at
December 31, 2005. These commitments are accounted for as derivatives and are
marked to fair value with changes in fair value recorded in mortgage banking
income. Mortgage origination-related derivatives are included in other assets
and 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, 2005 the Company had $4.092 million in locked
forward sales agreements in place. Forward sale-related derivatives are included
in other assets and other liabilities.

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

The Company does not have
any variable interest entities or other off-balance sheet financing vehicles as
of December 31, 2005.

---

`FIRST M&F CORPORATION AND SUBSIDIARY

                                           TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes the obligations of the Company.

(Amounts in thousands)                                                      Payments Due by Period
                                             -------------------------------------------------------------------------------------
                                                                    Less                                               More
                                                                   Than 1            1 - 3            3 - 5           Than 5
Contractual Obligations                           Total             Year             Years            Years            Years
-------------------------------------------- ---------------- ----------------- ---------------- ---------------- ----------------
Long-Term Debt                                 $   113,852        $ 29,737          $ 29,415         $ 45,753         $ 8,947
Capital Lease Obligations                                -               -                 -                -               -
Operating Leases                                     3,172           1,273             1,532              299              68
Purchase Obligations                                     -               -                 -                -               -
Other Long-Term Liabilities                              -               -                 -                -               -
                                             ---------------- ----------------- ---------------- ---------------- ----------------
Total                                          $   117,024        $ 31,010          $ 30,947         $ 46,052         $ 9,015
                                             ================ ================= ================ ================ ================`

Long-term debt obligations
represent borrowings from the Federal Home Loan Bank that have an original
maturity in excess of one (1) year. Operating leases are primarily leases on
office space and information technology. Leases on office space range from those
that are month-to-month to 60-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.

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. The
following table shows the gap position of the Company at December 31, 2005,
placing variable-rate instruments in the earliest repricing category and
including estimated prepayment activity for certain loans and mortgage-backed
securities. The cash flows for deposits without maturities are estimated based
upon historical decay rates, averaged over increasing and decreasing rate
periods.

`-----------------------------------------------------------------------------------------------------------------------------------
                                                  Rate Sensitivity Gap Report
                                                    As of December 31, 2005
-----------------------------------------------------------------------------------------------------------------------------------

                                              Floating        1-12 months        1-5 years        Over 5 years          Total
                                            ---------------------------------------------------------------------------------------
Short-term funds                             $  3,700         $   3,021          $       -        $        -       $    6,721
Investments                                         -            42,032            121,217            20,770          184,019
Loans                                         244,737           415,426            250,850            27,771          938,784
                                            ---------------------------------------------------------------------------------------
   Total earning assets                       248,437           460,479            372,067            48,541        1,129,524

NOW, MMDA & savings                           111,187                 -            259,229                 -          370,416
Time deposits                                       -           110,650            301,825            26,591          439,066
Short-term borrowings                               -            18,062                  -                 -           18,062
Other borrowings                                2,642            47,566             98,326                 -          148,534
                                            ---------------------------------------------------------------------------------------
   Total int. bearing liabilities             113,829           176,278            659,380            26,591          976,078

Rate sensitive gap                           $134,608          $284,201          $(287,313)       $   21,950

Cumulative gap                               $134,608          $418,809          $ 131,496        $  153,446
                                            -----------------------------------------------------------------------
Cumulative % of assets                         10.62%            33.05%             10.38%            12.11%
                                            -----------------------------------------------------------------------`

Interest rate shock
analysis shows that the Company will experience a 10 basis point decrease over
12 months in its net interest margin with an immediate and sustained 100 basis
point decrease in interest rates. An immediate and sustained increase in
interest rates of 100 basis points will result in an 8 basis point increase in
net interest margin. The higher sensitivity of loan pricing in a falling rate
environment than in a rising rate environment and the tendency of deposit rate
changes to lag the general interest rate trends in a period of rising rates,
combined with the Companys current balance sheet gap position and mix of
interest-bearing and noninterest-bearing funding tend to give simulation results
for net interest margins that are positively correlated with interest rate
movements.

---

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 1.40% with an immediate and sustained
increase in interest rates of 100 basis points. The market value of equity will
decrease by 3.24% with an immediate and sustained decrease in interest rates of
100 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 Company has no hedging
instruments in place at December 31, 2005.

---

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, 2005. Managements assessment of
the effectiveness of internal control over financial reporting as of December
31, 2005 has been audited by Shearer, Taylor & Co., P.A., an independent
registered public accounting firm, as stated in their report which is contained
herein.

`/s/ Hugh S. Potts, Jr.                                                                  /s/ John G. Copeland
Hugh S. Potts, Jr.                                                                      John G. Copeland
Chairman and Chief Executive Officer                                                    EVP and Chief Financial Officer`

---

We have audited
managements assessment, included in the accompanying Managements
Annual Report on Internal Control Over Financial Reporting, that First
M&F Corporation maintained effective internal control over financial
reporting as of December 31, 2004, 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. Our responsibility is to express an
opinion on the effectiveness of 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 included
obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and 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,
managements assessment that First M&F Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, First
M&F Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, 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 3, 2006, expressed an unqualified opinion.

`/s/ Shearer, Taylor & Co., P.A.
Ridgeland, Mississippi
February 3, 2006`

---

We have audited the
accompanying consolidated statements of condition of First M&F
Corporation and subsidiary as of December 31, 2005 and 2004, 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, 2005. These financial statements are the responsibility of the
companys management. 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, 2005 and 2004, 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, 2005, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of First M&F Corporations
internal control over financial reporting as of December 31, 2005, 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 3, 2006, expressed an unqualified opinion on
managements assessment of internal control over financial reporting and an
unqualified opinion on the effectiveness of internal control over financial
reporting.

`/s/ Shearer, Taylor & Co., P.A.
Ridgeland, Mississippi
February 3, 2006`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                                Consolidated Statements of Condition
                                                     December 31, 2005 and 2004
                                                 (In Thousands, Except Share Data)

Assets                                                                                         2005                 2004
                                                                                         -----------------    -----------------

Cash and due from banks                                                                     $   56,398            $   40,376
Interest-bearing bank balances                                                                   3,021                 5,105
Federal funds sold                                                                               3,700                 3,550
Securities available for sale, amortized
    cost of $186,242 and $172,808                                                              185,071               175,654
Loans held for sale                                                                              5,704                12,236

Loans, net of unearned income                                                                  933,080               832,486
    Allowance for loan losses                                                                  (12,449)              (11,619)
                                                                                         -----------------    -----------------
       Net loans                                                                               920,631               820,867
                                                                                         -----------------    -----------------

Bank premises and equipment                                                                     28,922                25,999
Accrued interest receivable                                                                      9,101                 7,126
Other real estate                                                                                3,042                 3,314
Goodwill                                                                                        16,348                16,348
Other intangible assets                                                                            358                   413
Other assets                                                                                    34,822                31,724
                                                                                         -----------------    -----------------

                                                                                            $1,267,118            $1,142,712
                                                                                         =================    =================
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing deposits                                                                $  164,189            $  137,728
Interest-bearing deposits                                                                      809,482               739,536
                                                                                         -----------------    -----------------
       Total deposits                                                                          973,671               877,264
                                                                                         -----------------    -----------------
Short-term borrowings                                                                           18,062                16,808
Other borrowings                                                                               148,534               128,838
Accrued interest payable                                                                         2,717                 1,728
Other liabilities                                                                                6,736                 5,605
                                                                                         -----------------    -----------------
       Total liabilities                                                                     1,149,720             1,030,243
                                                                                         -----------------    -----------------

Noncontrolling joint venture interest                                                               21                     1
                                                                                         -----------------    -----------------

Stockholders' 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: 4,495,159 and 4,506,159 shares issued                                            22,476               22,531
Additional paid-in capital                                                                       29,340               29,587
Nonvested restricted stock awards                                                                    86                    -
Retained earnings                                                                                68,058               60,113
Accumulated other comprehensive income (loss)                                                    (2,583)                 237
                                                                                         -----------------    -----------------
       Total stockholders' equity                                                               117,377              112,468
                                                                                         -----------------    -----------------

                                                                                             $1,267,118           $1,142,712
                                                                                         =================    =================



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

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                                 Consolidated Statements of Income
                                            Years Ended December 31, 2005, 2004 and 2003
                                                 (In Thousands, Except Share Data)

                                                                          2005                 2004                 2003
                                                                     ----------------    -----------------    -----------------
Interest income:
Interest and fees on loans                                              $   59,022          $   50,053           $   48,324
Interest on loans held for sale                                                421                 374                  482
Taxable investments                                                          5,797               5,439                6,653
Tax-exempt investments                                                       2,024               2,212                2,378
Federal funds sold                                                             194                 113                  192
Interest-bearing bank balances                                                 214                  98                  108
                                                                     ----------------    -----------------    -----------------
       Total interest income                                                67,672              58,289               58,137
                                                                     ----------------    -----------------    -----------------

Interest expense:
Deposits                                                                    17,728              11,736               13,399
Short-term borrowings                                                          776                 664                  608
Other borrowings                                                             4,680               4,650                3,850
                                                                     ----------------    -----------------    -----------------
       Total interest expense                                               23,184              17,050               17,857
                                                                     ----------------    -----------------    -----------------

       Net interest income                                                  44,488              41,239               40,280
Provision for loan losses                                                    3,146               5,351                3,802
                                                                     ----------------    -----------------    -----------------
       Net interest income after
       provision for loan losses                                            41,342              35,888               36,478
                                                                     ----------------    -----------------    -----------------

Noninterest income:
Service charges on deposit accounts                                          8,475               7,545                7,528
Mortgage banking income                                                        820                 802                  941
Agency commission income                                                     3,910               3,822                3,505
Trust and brokerage income                                                     484                 433                  310
Bank owned life insurance income                                               429                 580                  532
Securities gains (losses), net                                                 (24)                 46                    7
Other income                                                                 2,307               1,941                1,315
                                                                     ----------------    -----------------    -----------------
       Total noninterest income                                             16,401              15,169               14,138
                                                                     ----------------    -----------------    -----------------

Noninterest expenses:
Salaries and employee benefits                                              22,738              20,688               18,473
Net occupancy expenses                                                       2,544               2,304                2,129
Equipment expenses                                                           2,552               2,544                2,565
Software and processing expenses                                             1,144               1,325                1,261
Telecommunications expenses                                                    785                 807                  928
Marketing and business development expenses                                  1,380               1,453                1,136
Intangible asset amortization                                                   55                  76                  115
Other expenses                                                               7,943               7,797                8,125
                                                                     ----------------    -----------------    -----------------
       Total noninterest expense                                            39,141              36,994               34,732
                                                                     ----------------    -----------------    -----------------

       Income before income taxes                                           18,602              14,063               15,884
Income taxes                                                                 6,004               4,075                4,748
Noncontrolling interest in earnings (losses) of
subsidiaries, net of income taxes of $4, $469 and $145                           6                (787)                 244
                                                                     ----------------    -----------------    -----------------

       Net income                                                       $   12,592          $   10,775           $   10,892
                                                                     ================    =================    =================

Earnings per share:
    Basic                                                               $     2.80          $     2.37           $     2.36
    Diluted                                                                   2.79                2.36                 2.35
                                                                     ================    =================    =================

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

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                          Consolidated Statements of Comprehensive Income
                                            Years Ended December 31, 2005, 2004 and 2003
                                                           (In Thousands)

                                                                          2005                 2004                 2003
                                                                     ----------------    -----------------    -----------------

Net income                                                             $   12,592          $   10,775           $   10,892

Other comprehensive income:
Change in unrealized gains (losses) on securities
    available for sale, net of tax of $1,507, $1,229
    and $1,226                                                             (2,534)             (2,081)              (2,058)
Reclassification adjustment for (gains) losses on securities
    available for sale included in net income, net of
    tax of $9, $18, and $3                                                     15                 (28)                  (4)
Minimum pension liability adjustment, net of tax
    of $179, $6, and $7                                                      (301)                (10)                 (12)
                                                                     ----------------    -----------------    -----------------

       Other comprehensive income                                          (2,820)             (2,119)              (2,074)
                                                                     ----------------    -----------------    -----------------

       Total comprehensive income                                      $    9,772          $    8,656           $    8,818
                                                                     ================    =================    =================

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

                                                FIRST M&F CORPORATION AND SUBSIDIARY
                                          Consolidated Statements of Stockholders' Equity
                                            Years Ended December 31, 2005, 2004 and 2003
                                                 (In Thousands, Except Share Data)

                                                                     Nonvested                         Accumulated
                                                    Additional       Restricted                           Other
                                      Common          Paid-in          Stock          Retained        Comprehensive
                                       Stock          Capital          Awards         Earnings            Income           Total
                                    ------------    ------------    -------------    ------------    -----------------  ------------
January 1, 2003                     $   22,935      $   33,260                       $   47,585         $    4,430       $ 108,210

Net income                                   -               -                -          10,892                  -          10,892
Cash dividends ($1.00 per
     share)                                  -               -                -          (4,604)                 -          (4,604)
147,846 common shares issued
     in exercise of stock options          739           3,251                -               -                  -           3,990
169,854 common shares
     repurchased                          (849)         (4,887)               -               -                  -          (5,736)
Net change                                   -               -                -               -             (2,074)         (2,074)
                                    ------------    ------------    -------------    ------------    -----------------  ------------

December 31, 2003                       22,825          31,624                -          53,873              2,356         110,678
                                    ------------    ------------    -------------    ------------    -----------------  ------------

Net income                                   -               -                -          10,775                  -          10,775
Cash dividends ($1.00 per
     share)                                  -               -                -          (4,535)                 -          (4,535)
40,721 common shares issued
     in exercise of stock options          204             877                -               -                  -           1,081
99,600 common shares
     repurchased                          (498)         (2,914)               -               -                  -          (3,412)
Net change                                   -               -                -               -             (2,119)         (2,119)
                                    ------------    ------------    -------------    ------------    -----------------  ------------

December 31, 2004                       22,531          29,587                -          60,113                237         112,468
                                    ------------    ------------    -------------    ------------    -----------------  ------------

Net income                                   -               -                -          12,592                  -          12,592
Cash dividends ($1.03 per
     share)                                  -               -                -          (4,648)                 -          (4,648)
3,000 shares of unrestricted
     stock awards issued                    15              86                -               -                  -             101
6,000 common shares issued
     in exercise of stock options           30             129                -               -                  -             159
20,000 common shares
     repurchased                          (100)           (590)               -               -                  -            (690)
Share-based compensation
     recognized                              -              10               86               1                  -              97
Tax benefits on stock option
     transactions                            -             118                -               -                  -             118
Net change                                   -               -                -               -             (2,820)         (2,820)
                                    ------------    ------------    -------------    ------------    -----------------  ------------

December 31, 2005                   $   22,476      $   29,340       $       86      $   68,058        $    (2,583)     $  117,377
                                    ============    ============    =============    ============    =================  ============

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

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                               Consolidated Statements of Cash Flows
                                            Years Ended December 31, 2005, 2004 and 2003
                                                           (In Thousands)

                                                                          2005                 2004                 2003
                                                                     ----------------    -----------------    -----------------

Cash flows from operating activities:
Net income                                                              $   12,592          $   10,775           $   10,892
Adjustments to reconcile net income
    to net cash provided by operating activities:
    Share-based compensation                                                   198                   -                    -
    Depreciation and amortization                                            1,995               1,926                1,933
    Provision for loan losses                                                3,146               5,351                3,802
    Net investment amortization                                                444                 829                  977
    Capitalized dividends on FHLB stock                                       (298)               (123)                (110)
    Net change in unearned fees/deferred costs on loans                        159                  50                 (277)
    Net accretion of discount on time deposits                                  45                   1                    -
    (Gain) loss on securities available for sale                                24                 (46)                  (7)
    Gains on loans held for sale                                              (231)                (96)                 (59)
    Other asset sale (gains) losses                                            573                  78                  180
    Earnings (loss) of noncontrolling interest                                  10              (1,256)                 389
    Deferred income taxes                                                     (241)                (23)                (330)
(Increase) decrease in:
    Accrued interest receivable                                             (1,975)                204                 (205)
    Cash surrender value of bank owned life insurance                         (429)               (580)                (532)
    Loans held for sale                                                      6,746                  25                 (359)
    Other assets                                                            (1,431)               (822)                 267
Increase (decrease) in:
    Accrued interest payable                                                   990                 349                 (541)
    Other liabilities                                                        1,539              (1,226)                (527)
                                                                     ----------------    -----------------    -----------------

       Net cash provided by operating activities                            23,856              15,416               15,493
                                                                     ----------------    -----------------    -----------------

Cash flows from investing activities:
Purchases of securities available for sale                                 (82,317)            (38,134)             (33,980)
Sales of securities available for sale                                       3,178              15,086                4,063
Maturities of securities available for sale                                 65,236              30,832               74,189
Net (increase) decrease in:
    Interest-bearing bank balances                                           2,084              (2,551)              10,056
    Federal funds sold                                                        (150)             (2,600)               6,750
    Loans                                                                 (105,278)            (75,612)            (106,062)
    Bank premises and equipment                                             (4,773)             (4,095)              (4,492)
Purchases, net of redemptions, of FHLB stock                                    (2)               (475)              (2,646)
Proceeds from sales of other real estate and other
    repossessed assets                                                       1,967               2,049                1,427
Proceeds from sale of loans by consolidated joint venture, net                   -               2,789                    -
                                                                     ----------------    -----------------    -----------------

       Net cash used in investing activities                              (120,055)            (72,711)             (50,695)
                                                                     ----------------    -----------------    -----------------

Cash flows from financing activities:
Net increase (decrease) in:
    Noninterest-bearing deposits                                            26,461              14,000               21,276
    Money market, NOW and savings deposits                                  33,490               4,031              (24,638)
    Certificates of deposit                                                 36,411              38,469                 (436)
    Short-term borrowings                                                    1,254               1,603               (8,394)
Proceeds from other borrowings                                              72,800              45,750               76,100
Repayments of other borrowings                                             (53,144)            (39,160)             (25,836)
Contributions of, net of distributions to, noncontrolling
    interests                                                                   10                  (5)                   -
Cash dividends                                                              (4,648)             (4,535)              (4,604)
Common shares issued                                                           159               1,081                3,990
Common shares repurchased                                                     (690)             (3,412)              (5,736)
Tax benefits on stock option transactions                                      118                   -                    -
                                                                     ----------------    -----------------    -----------------

       Net cash provided by financing activities                           112,221              57,822               31,722
                                                                     ----------------    -----------------    -----------------

       Net increase (decrease) in cash and due from banks                   16,022                 527               (3,480)

Cash and due from banks at January 1                                        40,376              39,849               43,329
                                                                     ----------------    -----------------    -----------------

Cash and due from banks at December 31                                  $   56,398          $   40,376           $   39,849
                                                                     ================    =================    =================

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

---

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.

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.

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 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.

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
includes net income reported in the statements of income and changes in
unrealized gain (loss) on securities available for sale and minimum pension
liability reported as a component of stockholders equity. Unrealized gain
(loss) on securities available for sale and minimum pension liability, net of
deferred income taxes, are the only components of accumulated other
comprehensive income (loss) for the Company.

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,
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 other income.

---

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 when, in the
judgment of management, the collection of interest, but not necessarily
principal, is doubtful.

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.

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 loans as well as estimated probable credit losses
inherent in the remainder of the loan portfolio. Management considers a number
of factors in estimating probable credit losses inherent in the loan portfolio,
including: historical loan loss experience for various types of loans;
composition of the loan portfolio; past due trends in the loan portfolio;
current trends; current economic conditions; industry exposure and allowance
allocation percentages for various grades of loans, with such grades being
assigned to loans based on 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
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 acquired
through partial or total satisfaction of loans is carried at the lower of fair
value or the recorded loan balance at 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.

---

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. The Company
has no intangible assets having indefinite lives other than goodwill. 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 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. The following table shows the 2005 effect
of share-based compensation on certain operating items of adopting SFAS No.
123R.

`(In thousands, except share data)                                                  Under SFAS No. 123 And
                                                Under SFAS No. 123R                  APB Opinion No. 25               Difference
                                            -----------------------------     ---------------------------------     ---------------
Net 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                                 -                       118

Earnings 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 2005, 2004
and 2003: expected dividend yield of 3.25%, 3.25% and 5.00%; expected volatility
of 22.35%, 22.35% and 22.57%; risk-free interest rate of 6.50%; and an expected
life of 10 years. The estimated fair values of stock options at their grant date
were $9.75 in 2005, $9.96 in 2004 and $7.67 in 2003.

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements



Note 1:  (Continued)

Stock-based Compensation

(In thousands, except share data)                                          2005                2004                 2003
                                                                       --------------    -----------------    -----------------

Net income, as reported                                                  $   12,592        $   10,775           $   10,892
Add: Stock option expense recognized, net of taxes                                6                 -                    -
         Restricted stock award expenses recognized, net of taxes                54                 -                    -
         Unrestricted stock award expenses recognized, net of                    63                 -                    -

Less: Total stock option expense determined under
          the fair value method, net of taxes                                    11                29                   85
          Restricted stock award expenses, net of taxes                          54                 -                    -
          Unrestricted stock award expenses, net of taxes                        63                 -                    -
                                                                       --------------    -----------------    -----------------

Net income, pro forma                                                    $   12,587        $   10,746           $   10,807
                                                                       ==============    =================    =================

Earnings per share, as reported:
     Basic                                                               $     2.80        $     2.37           $     2.36
     Diluted                                                                   2.79              2.36                 2.35
                                                                       ==============    =================    =================

Earnings per share, pro forma:
     Basic                                                               $     2.80        $     2.36           $     2.34
     Diluted                                                                   2.79              2.35                 2.33
                                                                       ==============    =================    =================


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.

Statements of Cash Flows

In the accompanying consolidated statements of cash flows, the Company and subsidiary have defined cash equivalents as those
amounts included in the consolidated statement of condition caption "Cash and Due from Banks."  The following supplemental
disclosures are made related to the consolidated statements of cash flows:

(In thousands)                                                             2005                2004                 2003
                                                                      ---------------    -----------------    -----------------
Interest paid                                                           $   22,149         $   16,701           $   18,398
Federal and state income taxes paid                                          4,479              5,217                4,655
Other real estate and repossessions
     acquired in noncash foreclosures                                        2,121              3,920                1,575
                                                                      ===============    =================    =================

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 3, 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.`

---

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

`o      FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
            Guarantees of Indebtedness of Others - An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
            Interpretation No. 34"

     o      FASB Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with
            Characteristics of Both Liabilities and Equity"

     o      FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51"

     o      FASB Statement of Financial Accounting Standards (SFAS) No. 132 (R) (revised 2003), "Employer's Disclosures about
            Pensions and Other Post-Retirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106"

     o      FASB Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments
            and Hedging Activities"

     o      SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments"

     o      FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB
            Statement No. 143", and

     o      EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments"`

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and
FASB Statement No. 3." This statement generally requires retrospective application to prior periods' financial statements of
changes in accounting principle, whereas under APB Opinion No. 20 the cumulative effect of a change in accounting principle was
included in net income of the period in which the change was made. This Statement also requires that a change in depreciation,
amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected
by a change in accounting principle, and therefore, accounted for prospectively. This Statement carries forward the guidance in
APB Opinion No. 20 related to corrections of errors. SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption to have a material impact on its
financial condition or results of operations.

In November 2005, the FASB issued FASB Staff Position Nos. FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." This pronouncement relates to determining when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. This pronouncement (1)
nullifies paragraphs 10 - 18 of EITF Issue No. 03-1 related to determining when an impairment is other-than-temporary, (2) carries
forward the requirements of paragraphs 8 and 9 of Issue 03-1 with respect to cost-method investments, (3) carries forward the
disclosure requirements included in paragraphs 21 and 22 of Issue 03-1, which are presented in Note 2 to the Company's financial
statements, and related examples and (4) references existing other-than-temporary impairment guidance as a replacement to the
specific guidance originally given in paragraphs 10 - 18 of EITF Issue No. 03-1. The provisions of this FSP are to be applied to
reporting periods beginning after December 15, 2005. The Company does not expect the adoption to have a material impact on its
financial condition or results of operations.

Certain reclassifications have been made to the 2004 and 2003 financial statements to be consistent with 2005 presentation.

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements



Note 2:  Securities Available for Sale

The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2005 and 2004:

(In thousands)                                                                         Gross Unrealized
                                                                  Amortized       ----------------------------        Fair
                                                                    Cost            Gains           Losses           Value
                                                                --------------    -----------    -------------    -------------

December 31, 2005:
U. S. Treasury securities                                        $  3,993          $    6           $   36          $  3,963
U. S. Government agencies                                          69,888              26              846            69,068
Mortgage-backed investments                                        50,128             296              920            49,504
Obligations of states and political subdivisions                   52,549             685              360            52,874
Other                                                               8,644              25               59             8,610
Equity securities                                                   1,040              28               16             1,052
                                                                --------------    -----------    -------------    -------------

                                                                 $186,242          $1,066           $2,237          $185,071
                                                                ==============    ===========    =============    =============

December 31, 2004:
U. S. Treasury securities                                        $    528          $   22           $    -          $    550
U. S. Government agencies                                          61,564             393              161            61,796
Mortgage-backed investments                                        46,718             891              212            47,397
Obligations of states and political subdivisions                   54,274           1,867               52            56,089
Other                                                               8,686             103               29             8,760
Equity securities                                                   1,038              27                3             1,062
                                                                --------------    -----------    -------------    -------------

                                                                 $172,808          $3,303           $  457          $175,654
                                                                ==============    ===========    =============    =============

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, 2005 and 2004.

(In thousands)                        Less Than 12 Months               12 Months or More                       Total
                                  -----------------------------    -----------------------------    ------------------------------
                                     Fair          Unrealized         Fair          Unrealized          Fair          Unrealized
December 31, 2005:                   Value           Losses           Value           Losses           Value            Losses
                                  ------------    -------------    ------------    -------------    -------------    -------------
U. S. Treasury securities          $  3,429         $    36          $      -        $      -        $   3,429        $     36
U. S. Government agencies            57,095             704             7,367             142           64,462             846
Mortgage-backed investments          24,395             531            10,342             389           34,737             920
Obligations of states and
     political subdivisions           9,495             192             5,733             168           15,228             360
Other                                 2,189               2             1,575              57            3,764              59
Equity securities                         -               -               969              16              969              16
                                  ------------    -------------    ------------    -------------    -------------    -------------

                                   $ 96,603         $ 1,465          $ 25,986        $    772        $ 122,589        $  2,237
                                  ============    =============    ============    =============    =============    =============

December 31, 2004:
U. S Government agencies           $ 17,484         $   117          $  1,990        $     44        $  19,474        $    161
Mortgage-backed investments          14,039             211               121               1           14,160             212
Obligations of states and
     political subdivisions           4,072              27             1,741              25            5,813              52
Other                                 2,894              29                 -               -            2,894              29
Equity securities                       982               3                 -               -              982               3
                                  ------------    -------------    ------------    -------------    -------------    -------------

                                   $ 39,471         $   387          $  3,852        $     70        $  43,323        $    457
                                  ============    =============    ============    =============    =============    =============`

---

Management believes that
the impairments above are temporary and will be recovered over the
investments holding periods. The impairments on U. S. Treasury, Government
agency and mortgage-backed securities are due to interest rate fluctuations, as
the impaired investments all have AAA credit ratings. Management has the ability
and intent to hold these securities until their values are recovered. At
December 31, 2005 there were 47 impaired U. S. Treasury and Agency securities,
with 7 securities having impairments in excess of 12 months. At December 31,
2005 there were 48 impaired mortgage-backed securities, with 12 securities
having impairments in excess of 12 months. Management believes that the
municipality obligations will recover by or before their maturity dates based on
the facts that (1) most of the securities mature before the end of 2009, and (2)
management knows of no credit-related problems regarding any of the issuers. At
December 31, 2005 there were 76 impaired municipal securities with 29 securities
having impairments in excess of 12 months. The other securities represent 6
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,
3 have been impaired in excess of 12 months.

The amortized cost and fair
values of debt securities available for sale at December 31, 2005, 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.

`(In thousands)                                                                              Amortized               Fair
                                                                                               Cost                Value
                                                                                         -----------------    -----------------

One year or less                                                                            $   22,100           $   22,075
After one through five years                                                                   105,946              105,400
After five through ten years                                                                     5,800                5,827
After ten years                                                                                  1,228                1,213
                                                                                         -----------------    -----------------
                                                                                               135,074              134,515
Mortgage-backed investments                                                                     50,128               49,504
                                                                                         -----------------    -----------------

                                                                                             $ 185,202            $ 184,019
                                                                                         =================    =================

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.

(In thousands)                                                                              Amortized               Fair
                                                                                               Cost                Value
                                                                                         -----------------    -----------------

December 31, 2005                                                                            $ 179,058            $ 177,812
                                                                                         =================    =================

December 31, 2004                                                                            $ 144,040            $ 146,532
                                                                                         =================    =================

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

(In thousands)                                                            2005                 2004                 2003
                                                                     ----------------    -----------------    -----------------

Gross realized gains                                                     $      -            $    95              $    36
Gross realized losses                                                         (24)               (49)                 (29)
                                                                     ----------------    -----------------    -----------------

                                                                         $    (24)           $    46              $     7
                                                                     ================    =================    =================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 3:  Loans

The Bank's loan portfolio includes commercial, consumer, agribusiness and residential loans throughout the State of Mississippi,
but primarily in its market area in Central and North Mississippi.  The following is a summary of the Bank's loans held for
investment, net of unearned income of $1.071 million and $1.092 million at December 31, 2005 and 2004:

(In thousands)                                                                                2005                 2004
                                                                                        -----------------    ------------------
Real estate loans:
     Residential                                                                             $ 227,166            $ 237,746
     Construction and land development                                                         181,036              110,480
     Farmland                                                                                   47,215               38,466
     Nonfarm nonresidential real estate                                                        281,735              267,230
Commercial, financial and agricultural                                                         151,599              128,735
Consumer                                                                                        41,457               46,678
Other                                                                                            2,872                3,151
                                                                                        -----------------    ------------------

                                                                                             $ 933,080            $ 832,486
                                                                                        =================    ==================

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:

(In thousands)                                                                             2005                   2004
                                                                                    -------------------    --------------------

Loans outstanding at January 1                                                             $   8,582             $   4,077
New loans and advances                                                                        60,865                35,466
Repayments                                                                                   (58,188)              (30,961)
                                                                                    -------------------    --------------------

Loans outstanding at December 31                                                              11,259             $   8,582
                                                                                    ===================    ====================


The following is a summary of nonperforming loans at December 31, 2005 and 2004:

(In thousands)                                                                                2005                 2004
                                                                                        -----------------    ------------------

Nonaccrual loans                                                                          $    1,403             $  3,302
Loans past due 90 days or more (based on contractual
     loan terms) and still accruing interest                                                     510                  645
                                                                                        -----------------    ------------------

                                                                                           $   1,913             $  3,947
                                                                                        =================    ==================


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. The following table
presents information about the Company's impaired loans as of December 31, 2005 and 2004.

(In thousands)                                                                                 2005                   2004
                                                                                        ------------------   ------------------
Impaired loans with an allowance                                                           $    1,643             $   1,077
Impaired loans without an allowance                                                                 -                 2,225
                                                                                        ------------------   -------------------

Total impaired loans                                                                       $    1,643             $   3,302
                                                                                        ==================   ===================

Allowance for impaired loans                                                               $      822             $     538
Average balance of impaired loans                                                               2,196                 4,618
Interest income recognized on impaired loans                                                       66                   138
                                                                                        ==================   ===================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements



Note 4:  Allowance for Loan Losses

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

(In thousands)                                                            2005                  2004                 2003
                                                                   ------------------    -----------------    -----------------

Balance at January 1                                                   $   11,619            $   10,891           $   10,258

Loans charged off                                                          (3,073)               (5,626)              (3,675)
Recoveries                                                                    757                 1,003                  506
                                                                   ------------------    -----------------    -----------------
          Net charge-offs                                                  (2,316)               (4,623)              (3,169)
                                                                   ------------------    -----------------    -----------------

Provision for loan losses                                                   3,146                 5,351                3,802
                                                                   ------------------    -----------------    -----------------

Balance at December 31                                                 $   12,449            $   11,619           $   10,891
                                                                   ==================    =================    =================


Note 5:  Bank Premises and Equipment

The following is a summary of bank premises and equipment at December 31, 2005 and 2004:

(In thousands)                                                                             2005                   2004
                                                                                    -------------------    --------------------

Land                                                                                    $    7,838               $    7,079
Buildings                                                                                   26,040                   23,347
Furniture, fixtures and equipment                                                           18,369                   17,105
Leasehold improvements                                                                         386                      389
                                                                                    -------------------    --------------------
                                                                                            52,633                   47,920
Less accumulated depreciation and amortization                                              23,711                   21,921
                                                                                    -------------------    --------------------

                                                                                        $   28,922               $   25,999
                                                                                    ===================    ====================

Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $1.943 million in
2005, $1.850 million in 2004, and $1.818 million in 2003.

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

(In thousands)                                                   2005                       2004                     2003
                                                          --------------------       --------------------      -----------------
Buildings and office space                                     $     358                 $     302                $     260
Computer equipment                                                   619                       642                      645
Other equipment and autos                                            192                       173                      124
                                                          --------------------       --------------------      -----------------
                                                                   1,169                     1,117                    1,029
Rental income                                                        (23)                      (28)                     (41)
                                                          --------------------       --------------------      -----------------

Net rent expense                                               $   1,146                 $   1,089                $     988
                                                          ====================       ====================      =================


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, 2005 are as follows:

(In thousands)
2006                                                                                   $    1,263
2007                                                                                        1,025
2008                                                                                          507
2009                                                                                          196
2010                                                                                          103
After 2010                                                                                     68
                                                                                  ---------------------

Total minimum lease payments                                                           $    3,162
                                                                                  =====================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 6:  Other Assets

The following is a summary of other assets at December 31, 2005 and 2004:

(In thousands)                                                                            2005                    2004
                                                                                   --------------------    --------------------

Cash surrender value of bank owned life insurance                                       $   14,278              $   13,849
Federal Home Loan Bank stock                                                                 7,956                   7,656
Deferred income tax                                                                          5,488                   3,570
Other                                                                                        7,100                   6,649
                                                                                   --------------------    --------------------

                                                                                        $   34,822              $   31,724
                                                                                   ====================    ====================

As a condition to borrowing funds from the Federal Home Loan Bank of Dallas (FHLB), 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.

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.  The Company had no
indefinite lived intangible assets other than goodwill.

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 8.6 years at December 31, 2005.  Noncompete agreement intangibles have 15 year lives with a remaining average life
of 4.5 years at December 31, 2005.

The following is a summary of amortized intangible assets at December 31, 2005:

(In thousands)                                                          Gross                                       Net
                                                                      Carrying             Accumulated            Carrying
                                                                       Amount             Amortization             Amount
                                                                  ------------------    ------------------    -----------------

Customer renewal lists                                               $       467           $       233           $      234
Noncompete agreements                                                        413                   289                  124
                                                                  ------------------    ------------------    -----------------

                                                                     $       880           $       522           $      358
                                                                  ==================    ==================    =================


Amortization expense for intangible assets having determinable useful lives amounted to $55 thousand in 2005, $76 thousand in
2004, and $115 thousand in 2003.  Estimated amortization expense for the five succeeding years at December 31, 2005, is as follows:

(In thousands)
                                2006                                             $   55
                                2007                                                 55
                                2008                                                 55
                                2009                                                 55
                                2010                                                 42
                                                                             ===============`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements

Note 7:  Deposits

The following is a summary of deposits at December 31, 2005 and 2004:

(In thousands)                                                                      2005                        2004
                                                                           ------------------------    ------------------------

Noninterest-bearing                                                                $  164,189                $  137,728

Interest-bearing:
     NOW and money market deposits                                                    308,301                   271,981
     Savings deposits                                                                  82,512                    85,342
     Certificates of deposit of $100 thousand or more                                 173,374                   166,467
     Brokered certificates of deposit                                                  20,834                     9,951
     Other certificates of deposit                                                    224,461                   205,795
                                                                           ------------------------    ------------------------
               Total interest-bearing                                                 809,482                   739,536
                                                                           ------------------------    ------------------------

               Total deposits                                                      $  973,671                $  877,264
                                                                           ========================    ========================

Interest expense on certificates of deposit of $100 thousand or more amounted to $5.026 million in 2005, $3.651 million in 2004
and $3.419 million in 2003.

At December 31, 2005, the scheduled maturities of certificates of deposit are as follows:

                          (In thousands)
                          2006                                       $  252,857
                          2007                                           67,056
                          2008                                           72,165
                          2009                                           21,845
                          2010                                            4,741
                          After 2010                                          5
                                                                  -----------------

                                                                     $  418,669
                                                                  =================

Note 8:  Short-Term Borrowings

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

(In thousands)                                                                                               Weighted
                                                          Balance Outstanding                              Average Rate
                                          ----------------------------------------------------       --------------------------
                                            Maximum            Average              At                During            At
                                           Month End            Daily            Year End              Year          Year End
                                          -------------     --------------    ----------------       ----------     -----------
2005:
Federal funds purchased                     $ 17,400            $ 4,182         $     -                3.77%                -
Securities sold under
  agreements to repurchase                    18,062             14,874          18,862                4.16%            3.74%
                                          -------------     --------------    ----------------       ==========     ===========

                                            $ 35,462            $19,056         $18,062
                                          =============     ==============    ================

2004:
Federal funds purchased                     $ 31,900            $ 5,411         $     -                1.97%                -
Securities sold under
  agreements to repurchase                    18,872             15,428          16,808                3.61%            3.75%
                                          -------------     --------------    ----------------       ==========     ===========

                                            $ 50,772            $20,839         $16,808
                                          =============     ==============    ================

2003:
Federal funds purchased                     $  8,600            $ 1,773         $     -                1.36%                -
Securities sold under
  agreements to repurchase                    22,859             16,984          15,205                3.44%            3.57%
                                          -------------     --------------    ----------------       ==========     ===========

                                            $ 31,459            $18,757         $15,205
                                          =============     ==============    ================

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 corporations.`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements



Note 9:  Other Borrowings

The following is a summary of other borrowings at December 31, 2005 and 2004:

(In thousands)                                                                           2005                     2004
                                                                                 ---------------------    ---------------------

Company's line of credit in the amount of $15 million,
renewable annually; secured by approximately 29% of the
Bank's common stock; interest payable quarterly at .75%
below the lender's base rate                                                        $        2,642           $        6,642

Bank's advances from the Federal Home Loan Bank of Dallas, net                             145,852                  122,196

Banks' insurance subsidiary other note payable                                                  40                        -
                                                                                 ---------------------    ---------------------

                                                                                    $      148,534           $      128,838
                                                                                 =====================    =====================


The Bank has advances from the Federal Home Loan Bank of Dallas (FHLB) 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 following is a summary of these advances,
exclusive of purchase accounting adjustments, at December 31, 2005 and 2004:

(In thousands)                                                                             2005                   2004
                                                                                    -------------------    --------------------

Single payment advances maturing within 12 months of year end:
Balance                                                                                 $  47,500              $  35,530
Range of rates                                                                        2.80%-4.65%            1.30%-8.16%

Single payment advances maturing after 12 months of year end:
Balance                                                                                 $  44,800              $  23,500
Range of rates                                                                        4.24%-6.50%            2.80%-6.50%
Range of maturities                                                                     2008-2016              2006-2010

Amortizing advances:
Balance                                                                                 $  53,552              $  63,166
Monthly payment amount                                                                      1,165                  1,290
Range of rates                                                                        2.17%-8.48%            2.17%-8.48%
Range of maturities                                                                     2006-2020              2005-2020

Scheduled principal payments on FHLB advances at December 31, 2005, are as follows:

                         (In thousands)
                         2006                                    $  61,737
                         2007                                       12,717
                         2008                                       16,698
                         2009                                       11,776
                         2010                                       33,977
                         After 2010                                  8,947
                                                            ------------------

                                                                 $ 145,852
                                                            ==================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 10:  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:

(In thousands)                                                                        2005                        2004
                                                                             ------------------------    -----------------------

Change in benefit obligation:
Projected benefit obligation at beginning of year                                  $    8,283                  $    8,038
Service cost                                                                                -                           -
Interest cost                                                                             457                         463
Actuarial (gain) loss                                                                     647                         217
Benefit payments                                                                         (454)                       (435)
                                                                             ------------------------    -----------------------
Projected benefit obligation at end of year                                             8,933                       8,283
                                                                             ------------------------    -----------------------

Change in plan assets:
Fair value of plan assets at beginning of year                                          7,451                       6,868
Actual return on plan assets                                                              513                         559
Employer contributions                                                                    300                         500
Benefit payments                                                                         (454)                       (435)
Expenses                                                                                  (23)                        (41)
                                                                             ------------------------    -----------------------
Fair value of plan assets at end of year                                                7,787                       7,451
                                                                             ------------------------    -----------------------

Funded status at measurement date:
Plan assets less than projected benefit obligation                                     (1,146)                       (832)
Unrecognized net actuarial loss                                                         3,670                       3,236
Unrecognized transition asset                                                             (37)                        (45)
Unamortized prior service credit                                                         (218)                       (256)
                                                                             ------------------------    -----------------------

Prepaid pension asset recognized                                                        2,269                       2,103

Pension accrual recognized                                                               (465)                       (465)
                                                                             ------------------------    -----------------------

Net amount recognized                                                              $    1,804                  $    1,638
                                                                             ========================    =======================

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

(In thousands)                                                                   2005                     2004
                                                                         ---------------------    ---------------------

Prepaid benefit cost                                                          $    2,269               $    2,103
Accrued benefit liability                                                         (3,415)                  (2,934)
Accumulated other comprehensive
  income, before income taxes                                                      2,950                    2,469
                                                                         ---------------------    ---------------------

Net amount recognized                                                         $    1,804               $    1,638
                                                                         =====================    =====================

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

(In thousands)                                                                   2005                     2004
                                                                         ---------------------    ---------------------

Projected benefit obligation                                                  $    8,933               $    8,283
Accumulated benefit obligation                                                     8,933                    8,283
Fair value of plan assets                                                          7,787                    7,451`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements



Note 10:  (Continued)

Net pension cost (benefit) included the following components:

(In thousands)                                                          2005                  2004                  2003
                                                                  ------------------    ------------------    -----------------

Service cost                                                         $          -          $          -          $          -
Interest cost                                                                 463                   469                   488
Expected return on plan assets                                               (504)                 (498)                 (419)
Amortization of transition asset                                               (9)                   (9)                   (9)
Amortization of prior service credit                                          (37)                  (37)                  (37)
Recognized actuarial (gain) loss                                              220                   220                   210
                                                                  ------------------    ------------------    -----------------

     Net pension cost                                                $        133          $        145          $        233
                                                                  ==================    ==================    =================

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

(In thousands)                                                          2005                  2004                  2003
                                                                  ------------------    ------------------    -----------------

Net pension cost                                                     $        133          $        145          $        233
Payments for expenses made on
  behalf of the plan                                                           56                    54                    93
                                                                  ------------------    ------------------    -----------------

                                                                     $        189          $        199          $        326
                                                                  ==================    ==================    =================

The following is a summary of weighted average assumptions:

                                                                         2005                 2004                  2003
                                                                   -----------------    ------------------    -----------------

Discount rate for determining current year's costs                      5.75%                6.00%                 6.75%
Discount rate for determining year end benefit obligation               5.25%                5.75%                 6.00%
Expected return on plan assets for determining current years' costs     7.00%                7.50%                 7.75%
Rate of compensation increase (plan is frozen)                             -%                   -%                    -%
                                                                   =================    ==================    =================

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 7.0% in 2005, and 7.8% in 2004.  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.  Management expects 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 also affect the determination of 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.  Based upon these assumptions, management estimated long-term returns of 8% in
2002, given the expected asset mix.  These return expectations have been reduced during the last three years due to economic
factors and the interest rate environment.  Management has determined that these assumptions are reasonable and are comparable to
the return assumptions generally predominant in the industry.

The plan's asset allocations at December 31, 2005 and 2004 by asset category are as follows:

                                                                                       2005                   2004
                                                                               ---------------------- ----------------------

Interest-bearing bank balances                                                           3%                     6%
Debt securities                                                                         33%                    32%
Equity securities                                                                       64%                    62%
                                                                               ---------------------- ----------------------

                                                                                       100%                   100%
                                                                               ====================== ======================

Equity securities included 9,434 shares of the Company's common stock at December 31, 2005 and 2004.`

---

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                Preferred
                                -------------------------- --------------------------- ------------------------

Equities                                   50%                           70%                  60%
Fixed-income                               30%                           40%                  35%
Cash                                        2%                            8%                   5%`

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

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

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

`(In thousands)
                    Year                                                                Expected payments
                  ---------------------------------------     ----------------------------------------------

                  2006                                                             $      481
                  2007                                                                    479
                  2008                                                                    481
                  2009                                                                    502
                  2010                                                                    526
                  2011 - 2015                                                           2,704
                                                              ==============================================

The Company expects to contribute $300 thousand to the pension plan in 2006.`

---

The Bank has a profit and
savings plan which includes features such as an Employee Stock Ownership Plan
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.
Total matching contributions accrued for this plan were $369 thousand in 2005,
$187 thousand in 2004, and $183 thousand in 2003. 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 2005, $65 thousand in 2004, and
$50 thousand in 2003.

At December 31, 2005 and
2004, the profit and savings plan owned 98,782 and 89,817 shares of the
Companys common stock.

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. The Company made a profit sharing contribution to the plan of $11
thousand and incurred administrative expenses of $1 thousand in 2005.

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 is 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 may be optioned or sold under
the plan is 500,000 shares. Under the provisions of the plan, the Company and
the participating employees and directors will execute 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 350,000. 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 200,000. The maximum number of shares that may be awarded in
forms other than options and stock appreciation rights is 250,000. The maximum
number of shares that may be awarded to Directors is 50,000.

As discussed in Note 1 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.

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 11:  (Continued)

The following is a summary of stock option activity:

                                                                                                              Weighted
                                                                                                               Average
                                                                                 Outstanding                  Exercise
                                                                                   Options                      Price
                                                                           ------------------------    ------------------------

January 1, 2003                                                                   319,752                     $    28.30
Options granted                                                                     2,500                          38.00
Options exercised                                                                (147,846)                         26.99
                                                                           ------------------------    ------------------------
December 31, 2003                                                                 174,406                          29.56
                                                                           ------------------------    ------------------------
Options granted                                                                     2,500                          34.73
Options exercised                                                                 (40,721)                         26.53
Options forfeited                                                                 (10,000)                         35.75
                                                                           ------------------------    ------------------------
December 31, 2004                                                                 126,185                          30.16
                                                                           ------------------------    ------------------------
Options granted                                                                     3,500                          34.00
Options exercised                                                                  (6,000)                         26.56
Options forfeited                                                                  (4,000)                         30.97
                                                                           ------------------------    ------------------------

December 31, 2005                                                                 119,685                     $    30.40
                                                                           ========================    ========================

The following is a summary of stock options outstanding at December 31, 2005:

                                                   Weighted              Weighted                                 Weighted
                                                   Average               Average                                  Average
                                                  Remaining              Exercise                                 Exercise
                                                 Contractual              Price-                                   Price-
     Exercise                Options                 Life                Options              Options             Options
    Price Range            Outstanding             (Years)             Outstanding          Exercisable         Exercisable
--------------------     -----------------     -----------------     -----------------     ---------------    -----------------
$ 20.00 - $ 20.25              4,000                 4.96                $ 20.09               3,500              $ 20.11
  25.25 -   27.92             45,185                 1.59                  27.56              43,985                27.62
  31.75 -   38.00             70,500                 3.88                  32.82              63,500                32.57

In August 2005 the Company issued 38,383 restricted stock awards at a grant date fair value of $34.15 to certain senior officers
of the Company. Substantially all of the shares vest in seven (7) years and are potentially forfeitable until the vesting date.
Additionally the shares include a performance condition that may accelerate vesting at the achievement of a diluted earnings per
share and net income target. Non-achievement of the performance condition during the seven (7) year vesting period would not
prevent vesting of the shares. In December 2005 the Company issued 18,500 restricted stock awards at a grant date fair value of
$33.71 to certain senior and executive officers of the Bank. 12,500 of the shares vest in seven (7) years with 3,000 shares
vesting in five (5) years and 3,000 shares vesting in three (3) years. The share awards issued in December have the same potential
acceleration criteria as the awards issued in August. At December 31, 2005 there was $1.845 million in unrecognized compensation
cost. The Company estimates that 4.00% (.57% annual rate) of the nonvested shares will be forfeited in determining net
compensation expenses recognized.

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 related to the
awards.

Note 12:  Other Expenses

Significant components of other expenses are summarized as follows:

(In thousands)                                                          2005                  2004                  2003
                                                                  ------------------    ------------------    -----------------

Postage and shipping                                                  $       604           $       619           $       637
Stationery and supplies                                                       866                   846                   716
Accounting, legal and professional fees                                       905                 1,234                 1,228
Insurance expense                                                             650                   613                   639
Other                                                                       4,918                 4,485                 4,905
                                                                  ------------------    ------------------    -----------------

                                                                      $     7,943           $     7,797           $     8,125
                                                                  ==================    ==================    =================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements

Note 13:  Income Taxes

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

(In thousands)                                                         Federal                State                Total
                                                                  ------------------    ------------------    -----------------
2005:
Current                                                               $  5,523               $     718            $  6,241
Current taxes related to noncontrolling interests                            3                       1                   4
Deferred                                                                  (209)                    (32)               (241)
                                                                  ------------------    ------------------    -----------------

Total                                                                 $  5,317               $     687            $  6,004
                                                                  ==================    ==================    =================

2004:
Current                                                               $  4,150               $     417            $  4,567
Current taxes related to noncontrolling interests                         (406)                    (63)               (469)
Deferred                                                                   (20)                     (3)                (23)
                                                                  ------------------    ------------------    -----------------

Total                                                                 $  3,724               $     351            $  4,075
                                                                  ==================    ==================    =================

2003:
Current                                                               $  4,385               $     548            $  4,933
Current taxes related to noncontrolling interests                          126                      19                 145
Deferred                                                                  (280)                    (50)               (330)
                                                                  ------------------    ------------------    -----------------

Total                                                                 $  4,231               $     517            $  4,748
                                                                  ==================    ==================    =================

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

(In thousands)                                                          2005                  2004                  2003
                                                                  ------------------    ------------------    -----------------

Amount computed using the Federal statutory
  rates on income before taxes                                        $  6,322                $  4,739             $  5,413
Increase (decrease) resulting from:
Tax exempt income, net of
  disallowed interest deduction                                           (665)                   (745)                (795)
State income tax expense,
  net of Federal effect                                                    453                     273                  329
Life insurance income                                                     (146)                   (197)                (181)
Other, net                                                                  40                       5                  (18)
                                                                  ------------------    ------------------    -----------------

                                                                      $  6,004                $  4,075             $   4,748
                                                                  ==================    ==================    =================

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, 2005 and 2004, consist of the
following:

(In thousands)                                                                      2005                        2004
                                                                           ------------------------    ------------------------

Allowance for loan losses                                                        $    4,643                  $    4,334
Loan fees                                                                               450                         374
Purchase accounting adjustments                                                          29                          43
Accrued expenses                                                                        377                         302
Minimum pension liability                                                             1,101                         921
Unrealized loss on securities available for sale                                        437                           -
Other                                                                                   478                         364
                                                                           ------------------------    ------------------------
               Total deferred tax assets                                              7,515                       6,338
                                                                           ------------------------    ------------------------

Fixed assets and depreciation                                                          (407)                       (507)
Federal Home Loan Bank stock dividends                                                 (623)                       (552)
Pension expense                                                                        (673)                       (611)
Unrealized gain on securities available for sale                                          -                      (1,061)
Prepaid expenses                                                                       (269)                          -
Other                                                                                   (55)                        (37)
                                                                           ------------------------    ------------------------
               Total deferred tax liabilities                                        (2,027)                     (2,768)
                                                                           ------------------------    ------------------------

                                                                                 $    5,488                  $    3,570
                                                                           ========================    ========================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 14:  Earnings Per Share

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

(In thousands, except share data)                                       2005                  2004                  2003
                                                                  ------------------    ------------------    -----------------

Basic earnings per share:
  Net income                                                        $   12,592            $   10,775            $   10,892
                                                                  ==================    ==================    =================

Weighted average shares outstanding                                  4,495,030             4,542,213             4,608,023
                                                                  ==================    ==================    =================

  Basic earnings per share                                          $     2.80            $     2.37            $     2.36
                                                                  ==================    ==================    =================

Diluted earnings per share:
  Net income                                                            12,592                10,775                10,892
                                                                  ==================    ==================    =================

Weighted average shares outstanding                                  4,495,030             4,542,213             4,608,023
Dilutive effect of options and restricted stock grants                   9,571                16,895                26,618
                                                                  ------------------    ------------------    -----------------

Adjusted weighted average shares outstanding                         4,504,601             4,559,108             4,634,641
                                                                  ==================    ==================    =================

  Diluted earnings per share                                        $     2.79            $     2.36            $     2.35
                                                                  ==================    ==================    =================

Stock options not included in adjusted shares
  due to anti-dilutive effect                                            1,825                   399                   237`

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.

The Dividend Reinvestment
and Stock Purchase Plan authorizes the sale of up to 100,000 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.

The Companys Board of
Directors approved a common stock repurchase program on August 14, 2002,
authorizing the repurchase of up to 184,590 shares of the Companys
outstanding common stock beginning in September, 2002. The authorization
specified that up to 92,295 shares may be repurchased in the first twelve months
with an additional 92,295 shares authorized for repurchase during the second
twelve month period.

The Companys Board of
Directors terminated the August 14, 2002, repurchase program and approved a
common stock repurchase program on March 12, 2003, authorizing the repurchase of
up to 240,000 shares of the Companys outstanding common stock beginning in
March, 2003. The authorization specified that the shares would be repurchased
within twelve months.

---

On April 14, 2004, the
Companys Board of Directors authorized a new stock repurchase program to
repurchase up to 120,000 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 that may be repurchased in any
calendar month to no more than 10,000.

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 shares per month through May 2006.

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 after the
first twelve months to allow for any needed adjustments. The reacquired shares
will be held as authorized but unissued shares to be used for general corporate
purposes.

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

`(In thousands)                                                          Gross                  Tax                  Net
                                                                  ------------------    ------------------    -----------------

December 31, 2005:
Net unrealized gain on securities available for sale                 $  (1,171)           $   (437)             $   (734)
Minimum pension liability                                               (2,950)             (1,101)               (1,849)
                                                                  ------------------    ------------------    -----------------

                                                                     $  (4,121)           $ (1,538)             $ (2,583)
                                                                  ==================    ==================    =================

December 31, 2004:
Net unrealized gain on securities available for sale                     2,846               1,061                 1,785
Minimum pension liability                                               (2,469)               (921)               (1,548)
                                                                  ------------------    ------------------    -----------------

                                                                     $     377            $    140              $    237
                                                                  ==================    ==================    =================

December 31, 2003:
Net unrealized gain on securities available for sale                     6,202               2,308                 3,894
Minimum pension liability                                               (2,453)               (915)               (1,538)
                                                                  ------------------    ------------------    -----------------

                                                                     $   3,749            $  1,393              $  2,356
                                                                  ==================    ==================    =================`

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.

---

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

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

Standby and commercial
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. When issuing letters of credit,
the Company applies the same credit policies and standards as it does in the
normal lending process. Collateral is obtained based upon the Companys
assessment of a customers credit worthiness. A liability of $181 thousand
is recognized at December 31, 2005 and a liability of $117 thousand is
recognized at December 31, 2004 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, 2005 and 2004 follows:

`(In thousands)                                           2005                    2004
                                                                   --------------------    -------------------
                 Commitments to extend credit                            $ 179,514               $ 139,277
                 Standby letters of credit                                  24,943                  17,295
                 Commercial letters of credit                                   84                     105
                                                                   ====================    ===================`

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 $12.229 million at
December 31, 2005. These commitments are accounted for as derivatives and marked
to fair value through mortgage banking income. At December 31, 2005 mortgage
origination-related derivatives with positive fair values of $1 thousand were
included in other assets and derivatives with negative fair values of $12
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, 2005 the Company had $4.092 million in locked
forward sales agreements in place. Forward sale-related derivatives with
positive fair values of $8 thousand were included in other assets and
derivatives with negative fair values of $10 thousand were included in other
liabilities.

---

Federal banking regulations
require that the Bank maintain certain cash reserves based on a percent of
deposits. This requirement was $17.496 million at December 31, 2005.

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, 2005, that all capital adequacy
requirements have been met.

As of December 31, 2005,
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, 2005 and 2004,
are also presented in the table:

`(In thousands)                                          Actual                   Minimum Capital              Well Capitalized
                                              --------------------------    -------------------------    -------------------------
                                                 Amount          Ratio         Amount         Ratio        Amount         Ratio
                                              --------------    --------    -------------    --------    ------------    ---------

December 31, 2005:
Total capital (to risk weighted assets):
Company                                         $  113,880       11.2%        $   81,057       8.0%       $        -           -
Bank                                               114,823       11.3%            80,976       8.0%          101,220       10.0%

Tier I capital (to risk weighted assets):
Company                                            101,425       10.0%            40,528       4.0%                -           -
Bank                                               102,369       10.1%            40,488       4.0%           60,732        6.0%

Tier I capital (to average assets):
Company                                            101,425        8.2%            49,377       4.0%                -           -
Bank                                               102,369        8.3%            49,335       4.0%           61,669        5.0%
                                              ==============    ========     =============   ========    ============    =========

December 31, 2004:
Total capital (to risk weighted assets):
Company                                         $  104,902       12.0%        $   70,143       8.0%       $        -            -
Bank                                               109,620       12.5%            70,046       8.0%           87,558        10.0%

Tier I capital (to risk weighted assets):
Company                                             93,923       10.7%            35,072       4.0%                -            -
Bank                                                98,656       11.3%            35,023       4.0%           52,535         6.0%

Tier I capital (to average assets):
Company                                             93,923        8.4%            44,850       4.0%                -            -
Bank                                                98,656        8.8%            44,808       4.0%           56,010         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. 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.

On October 12, 2005 the
Company announced the signing of definitive agreements to acquire Columbiana
Bancshares of Columbiana, Alabama and Crockett County Bancshares of Bells,
Tennessee. Columbiana Bancshares is the parent of the First National Bank of
Shelby County which has total assets of approximately $185 million. Crockett
County Bancshares is the parent of Bells Banking Company which has approximately
$31 million in total assets. The consideration paid in both acquisitions will be
in cash. The Company will pay approximately $31.0 million in cash for all
outstanding shares of Columbiana Bancshares with $2.5 million of the $31.0
million purchase price being held in escrow pending the resolution of contingent
obligations of Columbiana. The Company will pay approximately $7.4 million for
all outstanding shares of Crockett County Bancshares. Both transactions are
subject to the approval of the stockholders of the to-be-acquired institutions
and banking regulators and are expected to close in the first quarter of 2006.
The Company expects to fund the acquisitions primarily through the issuance of
trust preferred securities.

SFAS 107, Disclosures
about Fair Value of Financial Instruments, requires that the Company
disclose estimated fair value for its financial instruments. However, such
disclosures may be deemed not to be practicable for certain classes of financial
instruments.

Because no market exists
for a significant portion of the Companys and Banks financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes
in assumptions significantly affect the estimates and, as such, the derived fair
value may not be indicative of the value negotiated in an actual sale and may
not be comparable to that reported by other financial institutions.

In addition, the fair value
estimates are based on existing financial instruments without attempting to
estimate the value of anticipated business and the value of assets and
liabilities that are not considered financial instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in the
estimates. Fair value estimates, methods and assumptions for significant
financial instruments are set forth below:

Cash and due from banks,
interest-bearing deposits with banks and Federal funds sold - The net book value
of these financial instruments approximates fair value due to the immediate
availability or short maturity of these investments.

Securities available for
sale - The fair value of these financial instruments is considered to be their
fair value as disclosed in note 2.

Loans held for sale - The
fair value of these financial instruments is their carrying value at the
financial statement dates, as they are reported at fair value on those dates.

---

Loans held for investment -
The fair value of variable rate loans that reprice frequently, and with no
significant changes in credit risk, are based on carrying values. The fair value
of fixed rate loans is estimated by discounting the future cash flows, using the
current rates at which these loans would currently be made to borrowers with
similar credit ratings and similar maturities. The carrying value of loans, net
of the allowance for loan losses, is $920.631 million and $820.867 million and
the estimated net fair value of loans is $915.080 million and $816.848 million
at December 31, 2005 and 2004.

Deposits - 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. The carrying value of deposits is
$973.671 million and $877.264 million and the estimated net fair value of
deposits is $965.691 million and $870.426 million at December 31, 2005 and 2004.

Short-term and other
borrowings - The net book value of the majority of these financial instruments
approximates fair value due to the short term nature of these items or their
applicable interest rates and repricing and repayment terms. The fair value of
long term Federal Home Loan Bank (FHLB) advances is estimated by discounting the
future cash flows, using current market rates for borrowings of similar terms
and maturities. The carrying value of FHLB advances is $145.852 million and
$122.196 million and the estimated fair value of FHLB advances is $142.921
million and $120.191 million at December 31, 2005 and 2004. The fair value of
short-term and other borrowings is not materially different from their recorded
book value at December 31, 2005 and 2004, as disclosed in Note 8 and Note 9.

Commitments to extend
credit - Fair values for such commitments are typically based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the parties credit standing. The fair value of
commitments to extend credit is not material.

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

`STATEMENTS OF CONDITION

(In thousands)
                                                                             -------------------------   -------------------------
Assets                                                                                 2005                        2004
                                                                             -------------------------   -------------------------

Cash                                                                             $           358             $           703
Investment in subsidiary                                                                 118,320                     117,201
Other assets                                                                               1,341                       1,206
                                                                             -------------------------   -------------------------

                                                                                 $       120,019             $       119,110
                                                                             =========================   =========================
Liabilities and Stockholders' Equity

Note payable                                                                     $         2,642             $         6,642
Other liabilities                                                                              -                           -
Stockholders' equity                                                                     117,377                     112,468
                                                                             -------------------------   -------------------------

                                                                                 $       120,019             $       119,110
                                                                             =========================   =========================`

---

`FIRST M&F CORPORATION AND SUBSIDIARY
                                             Notes to Consolidated Financial Statements


Note 20: (Continued)

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

                                                        STATEMENTS OF INCOME

(In thousands)                                                              2005                  2004                 2003
                                                                       ----------------     -----------------    -----------------
Income:
Dividends received from subsidiary                                         $  9,200             $  6,600             $  8,600
Equity in undistributed earnings of subsidiary                                3,624                4,383                2,506
Other income                                                                     21                   35                   17
                                                                       ----------------     -----------------    -----------------
               Total income                                                  12,845               11,018               11,123
                                                                       ----------------     -----------------    -----------------

Expenses:
Interest                                                                        190                  228                  230
Other expenses                                                                  198                  139                  125
                                                                       ----------------     -----------------    -----------------
               Total expenses                                                   388                  367                  355
                                                                       ----------------     -----------------    -----------------

               Income before income taxes                                    12,457               10,651               10,768

Income tax benefit                                                              135                  124                  124
                                                                       ----------------     -----------------    -----------------

Net income                                                                 $ 12,592             $ 10,775             $ 10,892
                                                                       ================     =================    =================


                                                      STATEMENTS OF CASH FLOWS

(In thousands)                                                              2005                  2004                 2003
                                                                       ----------------     -----------------    -----------------
Cash flows from operating activities:
Net income                                                                 $ 12,592             $ 10,775             $ 10,892
Adjustments to reconcile net income to net
     cash provided by operating activities:
     Equity in undistributed earnings of subsidiary                          (3,624)              (4,383)              (2,506)
     Other, net                                                                (252)                (286)                (144)
                                                                       ----------------     -----------------    -----------------
               Net cash provided by operating activities                      8,716                6,106                8,242
                                                                       ----------------     -----------------    -----------------


                                                                       ----------------     -----------------    -----------------
               Net cash provided by investing activities                          -                    -                    -
                                                                       ----------------     -----------------    -----------------

Cash flows from financing activities:
Increase (decrease) in note payable                                          (4,000)                 750               (1,700)
Cash dividends                                                               (4,648)              (4,535)              (4,604)
Common shares issued                                                            159                1,081                3,990
Common shares repurchased                                                      (690)              (3,412)              (5,736)
Tax benefits on stock option transactions                                       118                    -                    -
                                                                       ----------------     -----------------    -----------------
               Net cash used in financing activities                         (9,061)              (6,116)              (8,050)
                                                                       ----------------     -----------------    -----------------

               Net increase (decrease) in cash                                 (345)                 (10)                 192

Cash at January 1                                                               703                  713                  521
                                                                       ----------------     -----------------    -----------------

Cash at December 31                                                        $    358             $    703             $    713
                                                                       ================     =================    =================`

---

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

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, 2005
(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 30 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 31 of this Annual Report
on Form 10-K and is hereby incorporated by reference.

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, 2005. The Companys independent registered public accounting firm has
also audited, and reported on, managements assessment of 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.

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.

None.

---

Information concerning
directors and executive officers 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.

Information concerning
executive compensation is incorporated by reference and contained in the Proxy
material on Page 7.

Information concerning
security ownership of owners and management is incorporated by reference and
contained in the Proxy material on Page 3 and following.

Information concerning
certain relationships and related transactions is incorporated by reference and
contained in the Proxy material on Page 12.

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 11.

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, 2005 and 2004
(e)      Consolidated Statements of Income - Years Ended December 31, 2005, 2004 and 2003
(f)      Consolidated Statements of Comprehensive Income - Years Ended December 31, 2005, 2004 and 2003
(g)      Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2005, 2004 and 2003
(h)      Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004 and 2003
(i)      Notes to Consolidated Financial Statements`

---

`FIRST M&F CORPORATION AND SUBSIDIARY

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`

---

`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. Copeland
         Hugh S. Potts, Jr.                                                     John G. Copeland
         Chairman of the Board and                                              EVP & Chief Financial Officer
         Chief Executive 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 8, 2006                                                            Hugh S. Potts, Jr., Director

                                                                                /s/ Scott M. Wiggers
DATE:  March 8, 2006                                                            Scott M. Wiggers, Director

                                                                                /s/ Fred A. Bell, Jr.
DATE:  March 8, 2006                                                            Fred A. Bell, Jr., Director

                                                                                /s/ Jeffrey A. Camp
DATE:  March 8, 2006                                                            Jeffrey A. Camp, Director

                                                                                /s/ Hollis C. Cheek
DATE:  March 8, 2006                                                            Hollis C. Cheek, Director

                                                                                /s/ Jon A. Crocker
DATE:  March 8, 2006                                                            Jon A. Crocker, Director

                                                                                /s/ Charles T. England
DATE:  March 8, 2006                                                            Charles T. England, Director

                                                                                /s/ Toxey Hall, III
DATE:  March 8, 2006                                                            Toxey Hall, III, Director

                                                                                /s/ Barbara K. Hammond
DATE:  March 8, 2006                                                            Barbara K. Hammond, Director

                                                                                /s/ Charles V. Imbler, Sr.
DATE:  March 8, 2006                                                            Charles V. Imbler, Sr., Director

                                                                                /s/ J. Marlin Ivey
DATE:  March 8, 2006                                                            J. Marlin Ivey, Director

                                                                                /s/ R. Dale McBride
DATE:  March 8, 2006                                                            R. Dale McBride, Director

                                                                                /s/ Susan P. McCaffery
DATE:  March 8, 2006                                                            Susan P. McCaffery, Director

                                                                                /s/ Michael L. Nelson
DATE:  March 8, 2006                                                            Michael L. Nelson, Director`

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`FIRST M&F CORPORATION AND SUBSIDIARY

Signatures: (Continued)


                                                                                /s/ Otho E. Pettit, Jr.
DATE:  March 8, 2006                                                            Otho E. Pettit, Jr., Director

                                                                                /s/ Charles W. Ritter, Jr.
DATE:  March 8, 2006                                                            Charles W. Ritter, Jr., Director

                                                                                /s/ L. F. Sams, Jr.
DATE:  March 8, 2006                                                            L. F. Sams, Jr., Director

                                                                                /s/ Michael W. Sanders
DATE:  March 8, 2006                                                            Michael W. Sanders, Director

                                                                                /s/ W. C. Shoemaker
DATE:  March 8, 2006                                                            W. C. Shoemaker, Director

                                                                                /s/ Larry Terrell
DATE:  March 8, 2006                                                            Larry Terrell, Director

                                                                                /s/ James I. Tims
DATE: March 8, 2006                                                             James I. Tims, Director`

---

`FIRST M&F CORPORATION AND SUBSIDIARY


                                                           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`