UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2012 Or

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

Commission File Number 000-09424

FIRST M&F CORPORATION

(Exact name of registrant as specified in its charter)

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

662-289-5121

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year,

if changed since the last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No   

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

x Yes   o No   

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

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

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

o Yes   x No   

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

Common stock, $5 par value	9,215,092 Shares
Title of Class	Shares Outstanding at October 31, 2012

FIRST M&F CORPORATION

FORM 10-Q

INDEX

		Page
PART I:	FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited):	3
	Consolidated Statements of Condition	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation	50
Item 3	Quantitative and Qualitative Disclosures About Market Risk	76
Item 4	Controls and Procedures	77
PART II:	OTHER INFORMATION
Item 1	Legal Proceedings	78
Item 1A	Risk Factors	78
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3	Defaults upon Senior Securities	78
Item 4	Mine Safety Disclosures	78
Item 5	Other Information	78
Item 6	Exhibits	79
SIGNATURES		80
EXHIBIT INDEX		81
CERTIFICATIONS

2

FIRST M & F CORPORATION AND SUBSIDIARY

PART I: FINANCIAL INFORMATION

Item 1 – Financial Statements (Unaudited)

Consolidated Statements of Condition

(Dollars in thousands)
	September 30, 2012			December 31, 2011
	(Unaudited)			(Note 1)
Assets
Cash and due from banks	$	41,605		$	39,976
Interest bearing bank balances	42,777			39,391
Federal funds sold	—			25,000
Securities available for sale, amortized cost of $345,957 and $315,890	354,188			320,774
Loans held for sale	23,548			26,073
Loans, net of unearned income	987,327			996,340
Allowance for loan losses	(16,656		)	(14,953		)
Net loans	970,671			981,387
Bank premises and equipment	37,429			37,989
Accrued interest receivable	6,123			6,122
Other real estate	28,002			36,952
Other intangible assets	4,266			4,586
Bank owned life insurance	23,032			22,477
Other assets	21,536			27,924
	$	1,553,177		$	1,568,651
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	233,684		$	231,718
Interest-bearing deposits	1,115,790			1,139,745
Total deposits	1,349,474			1,371,463
Federal funds purchased and repurchase agreements	5,225			4,398
Other borrowings	38,984			43,001
Junior subordinated debt	30,928			30,928
Accrued interest payable	806			1,023
Other liabilities	10,756			8,242
Total liabilities	1,436,173			1,459,055
Commitments and contingencies
Stockholders’ equity:
Preferred stock; 2,000,000 shares authorized; 30,000 shares issued and outstanding	18,528			17,564
Common stock of $5.00 par value; 50,000,000 shares authorized: 9,215,092 and 9,154,936 shares issued and outstanding	46,075			45,775
Additional paid-in capital	32,350			31,895
Nonvested restricted stock awards	304			674
Retained earnings	17,923			14,456
Accumulated other comprehensive income (loss)	1,824			(768		)
Total equity	117,004			109,596
	$	1,553,177		$	1,568,651

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

3

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share data)	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Interest income:
Interest and fees on loans	$	13,697		$	15,063		$	41,596		$	45,719
Interest on loans held for sale	162			53			579			121
Taxable investments	1,421			1,746			4,474			5,448
Tax-exempt investments	325			318			962			934
Federal funds sold	—			16			26			47
Interest bearing bank balances	20			43			99			141
Total interest income	15,625			17,239			47,736			52,410
Interest expense:
Deposits	2,032			3,234			6,778			10,604
Federal funds purchased and repurchase agreements	5			8			16			30
Other borrowings	423			479			1,311			1,512
Junior subordinated debt	293			293			879			1,043
Total interest expense	2,753			4,014			8,984			13,189
Net interest income	12,872			13,225			38,752			39,221
Provision for loan losses	1,980			2,580			6,540			7,440
Net interest income after provision for loan losses	10,892			10,645			32,212			31,781
Noninterest income:
Deposit account income	2,589			2,721			7,594			7,652
Mortgage banking income	1,357			524			3,730			1,203
Agency commission income	1,001			1,010			2,678			2,838
Trust and brokerage income	114			146			417			431
Bank owned life insurance income	154			163			523			522
Other income	444			395			1,585			1,447
Securities gains (losses), net	(27		)	460			565			2,150
Total investment other-than-temporary impairment losses	—			(129		)	(8		)	(367		)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)	(25		)	(71		)	(21		)	(214		)
Net investment impairment losses recognized	(25		)	(200		)	(29		)	(581		)
Total noninterest income	5,607			5,219			17,063			15,662
Noninterest expenses:
Salaries and employee benefits	6,900			7,457			20,500			21,570
Net occupancy expenses	917			992			2,757			2,932
Equipment expenses	422			476			1,308			1,392
Software and processing expenses	354			368			1,062			1,162
Telecommunication expenses	221			224			687			678
Marketing and business development expenses	272			299			776			776
Foreclosed property expenses	1,176			1,483			3,914			5,304
FDIC insurance assessments	333			545			1,400			1,896
Intangible asset amortization	107			106			320			320
Other expenses	3,358			2,193			9,641			7,227
Total noninterest expenses	14,060			14,143			42,365			43,257
Income before income taxes	2,439			1,721			6,910			4,186
Income tax expense	645			391			1,756			800
Net income	1,794			1,330			$	5,154		$	3,386
Dividends and accretion on preferred stock	479			448			1,413			1,320
Net income applicable to common stock	$	1,315		$	882		$	3,741		$	2,066
Net income allocated to common shareholders	$	1,264		$	878		$	3,629		$	2,054
Earnings per share:
Basic	0.14			0.10			$	0.40		$	0.23
Diluted	0.14			0.10			$	0.40		$	0.23

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

4

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Net income	$	1,794		$	1,330		$	5,154		$	3,386
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized gains on securities available for sale arising during the period, net of tax of $720 and $575 for the three months ended September 30 and $1,433 and $1,924 for the nine months ended September 30	1,209			965			2,414			3,234
Unrealized gains (losses) on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $1 and $81 for the three months ended September 30 and $14 and $76 for the nine months ended September 30	3			(135		)	22			(128		)
Reclassification adjustment for gains (losses) on securities available for sale included in net income, net of tax of $9 and $172 for the three months ended September 30 and $211 and $802 for the nine months ended September 30	18			(288		)	(354		)	(1,348		)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $10 and $75 for the three months ended September 30 and $11 and $217 for the nine months ended September 30	15			125			18			364
Unrealized losses net of settlements on cash flow hedge arising during the period, net of tax of $114 and $684 for the three months ended September 30 and $306 and $950 for the nine months ended September 30	(190		)	(1,148		)	(513		)	(1,596		)
Defined benefit pension plans:
Amortization of prior service cost, net of tax of $0 and $2 for the three months ended September 30 and $0 and $6 for the nine months ended September 30	—			(4		)	—			(12		)
Amortization of actuarial loss, net of tax of $199 and $91 for the three months ended September 30 and $597 and $274 for the nine months ended September 30	335			154			1,005			463
Other comprehensive income (loss)	1,390			(331		)	2,592			977
Total comprehensive income	$	3,184		$	999		$	7,746		$	4,363

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

5

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

(Dollars in thousands, except per share data)
	Preferred Stock		Common Stock		Additional Paid-In Capital			Nonvested Restricted Stock Awards			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
January 1, 2011	$	16,390	$	45,534	$	31,883		$	784		$	12,225		$	249		$	107,065
Net income	—		—		—			—			3,386			—			3,386
Cash dividends ($.03 per share)	—		—		—			—			(275		)	—			(275		)
29,914 shares granted to directors	—		150		(42		)	—			—						108
Dividends and accretion on preferred stock	870		—		—			—			(1,320		)	—			(450		)
6,000 restricted share awards vested	—		30		71			(101		)	—			—			—
Share-based compensation expense recognized	—		—		5			(36		)	—			—			(31		)
Net change	—		—		—			—			—			977			977
September 30, 2011	$	17,260	$	45,714	$	31,917		$	647		$	14,016		$	1,226		$	110,780
January 1, 2012	$	17,564	$	45,775	$	31,895		$	674		$	14,456		$	(768	)	$	109,596
Net income	—		—		—			—			5,154			—			5,154
Cash dividends ($.03 per share)	—		—		—			—			(284		)	—			(284		)
23,156 shares granted to directors	—		115		3			—			—			—			118
Dividends and accretion on preferred stock	964		—		—			—			(1,414		)	—			(450		)
37,000 restricted share awards vested	—		185		447			(632		)	—			—			—
Share-based compensation expense recognized	—		—		5			262			11			—			278
Net change	—		—		—			—			—			2,592			2,592
September 30, 2012	$	18,528	$	46,075	$	32,350		$	304		$	17,923		$	1,824		$	117,004

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

6

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	Nine Months Ended
	September 30
	2012			2011
Cash flows from operating activities:
Net income	$	5,154		$	3,386
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation	396			77
Amortization of pension costs	1,288			521
Depreciation and amortization	1,758			1,911
Provision for loan losses	6,540			7,440
Net investment amortization	3,294			1,665
Net change in unearned fees/deferred costs on loans	(1,326		)	(397		)
Capitalized dividends on FHLB stock	(21		)	(20		)
Gain on securities available for sale	(565		)	(2,150		)
Impairment loss on securities available for sale	29			581
Gain on loans held for sale	(2,656		)	(766		)
Other real estate losses	3,067			4,221
Other asset sales losses	168			207
Deferred income taxes	1,754			797
Originations of loans held for sale, net of repayments	(116,496		)	(50,614		)
Sales proceeds of loans held for sale	115,067			45,595
(Increase) decrease in:
Accrued interest receivable	(1		)	465
Cash surrender value of bank owned life insurance	(523		)	(522		)
Other assets	(2,340		)	(3,864		)
Increase (decrease) in:
Accrued interest payable	(217		)	(233		)
Other liabilities	2,453			1,998
Net cash provided by operating activities	16,823			10,298
Cash flows from investing activities:
Purchases of securities available for sale	(138,423		)	(157,489		)
Sales of securities available for sale	49,936			89,504
Maturities of securities available for sale	55,662			41,037
Purchases of loans held for investment	(8,109		)	(821		)
Net decrease in other loans held for investment	15,855			26,826
Net (increase) decrease in:
Interest bearing bank balances	(3,386		)	6,077
Federal funds sold	25,000			—
Bank premises and equipment	(832		)	(1,273		)
Net purchases of bank owned life insurance	(32		)	(38		)
Proceeds from sales of other real estate and other repossessed assets	9,860			6,829
Net redemptions of FHLB stock	5,204			—
Net cash provided by investing activities	10,735			10,652

7

FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	Nine Months Ended
	September 30
	2012			2011
Cash flows from financing activities:
Net increase (decrease) in deposits	$	(22,005	)	$	8,429
Net increase (decrease) in short-term borrowings	827			(25,107		)
Proceeds from other borrowings	—			686
Repayments of other borrowings	(4,017		)	(6,787		)
Common dividends paid	(284		)	(275		)
Preferred dividends paid	(450		)	(450		)
Net cash used in financing activities	(25,929		)	(23,504		)
Net increase (decrease) in cash and due from banks	1,629			(2,554		)
Cash and due from banks at January 1	39,976			45,099
Cash and due from banks at September 30	$	41,605		$	42,545
Supplemental disclosures:
Total interest paid	$	9,210		$	13,432
Total income taxes paid	192			4
Transfers of loans from held for sale to held for investment	6,576			454
Transfers of loans to foreclosed property	3,974			12,684
U. S. Treasury preferred dividend accrued but unpaid	75			75
Accretion on U. S. Treasury preferred stock	964			870

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

8

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1:  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed balance sheet as of December 31, 2011, has been derived from audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include all entities in which the Company has a controlling financial interest. Therefore, the condensed consolidated financial statements of First M & F Corporation include the financial statements of Merchants and Farmers Bank, a wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F Bank Securities Corporation, M & F Insurance Agency, Inc., M & F Insurance Group, Inc., and M & F Business Credit, Inc. The consolidated financial statements also include the Bank’s 55% ownership in MS Statewide Title, LLC, a title insurance agency. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

Use of Estimates

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

Reclassifications

Certain reclassifications have been made to the 2011 financial statements to be consistent with the 2012 presentation.

Loans Held for Sale

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

Loans Held for Investment

Loans that management has the ability and intent to hold for the foreseeable future or until maturity or payoff are considered held for investment. Loans held for investment are stated at the principal amount outstanding, net of unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees and direct loan origination costs, as well as purchase premiums and discounts, are deferred and recognized over the life of the related loans as adjustments to interest income using the level yield method.

The Bank discontinues the accrual of interest on loans and recognizes income only as received (places the loans in nonaccrual status) when, in the judgment of management, the collection of interest, but not necessarily principal, is doubtful. Unpaid accrued interest is charged against interest income on loans when they are placed in nonaccrual status. Payments received on loans in nonaccrual status are generally applied as a reduction to principal until such time that the Company expects to collect the remaining contractual principal. When a borrower of a loan that is in nonaccrual status can demonstrate the ability to repay the loan in accordance with its contractual terms, then the loan may be returned to accruing status. The Company determines past due status on all loans based on their contractual repayment terms. Loans are considered past due if either an interest or principal payment is past due in accordance with the loan’s contractual repayment terms.

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

9

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1:  (Continued)

Allowance and Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against earnings. Loans are considered uncollectible when available information confirms that the loan can’t be collected in full. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb estimated probable loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on estimated credit losses for specifically identified impaired loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio based primarily on historical loss rates. Several asset quality metrics, both quantitative and qualitative, are considered in estimating both specific impairments and in the application of historical loss rates. The fundamental tool used by management to select loans for individual impairment allowance testing and estimate contingency allowances is the individual loan risk rate. For the purpose of determining allowances, management segregates the loan portfolio primarily by risk rating and secondarily by whether the loan is collateral dependent. Management considers a number of factors in assigning risk rates to individual loans and in determining impairment allowances and in the application of historical loss rates, including: past due trends, current trends, current economic conditions, industry exposure, internal and external loan reviews, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant. The Company measures individually impaired loans at the fair value of collateral, less costs to sell, if the loan is collateral dependent. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. Loans not reviewed for specific impairment allowances are grouped into risk pools with similar traits and subjected to historical loss rates to estimate losses in each pool. Troubled debt restructurings are considered to be impaired loans and are included with the loans that are individually reviewed for impairment allowances. Troubled debt restructurings are loans in which the Company has granted a concession to the borrower which would not otherwise be considered due to the borrower’s financial difficulties.

Certain risk characteristics are common to all real estate lending, whether it be construction and land development, commercial real estate or residential real estate. Real property values can fall, creating loan to value problems that can be exacerbated by over supply and falling demand. General economic conditions including increasing or stagnant unemployment rates can have a negative effect on normally credit-worthy borrowers in each real estate segment. Debt service ratios can weaken if real estate sales fall off or have not fully recovered. Commercial and asset-based lending credits are directly affected by swings in the economy and the inherent risks from lower retail sales, due to lower consumer and commercial demand, falling rental prices and rental vacancies. Unemployment also can weigh heavily on business credits and put additional strain on commercial cash flows. Consumer lending is most directly affected by unemployment issues and consumer confidence in the economy and jobs market. Retail lending volumes and credit-worthiness can come under strain as prices rise and income opportunities decline. The Company considers all of these qualitative risks in its determination of not only individual loan risk grading but also decisions about individual loan impairments and the need for any overall environmental factor or any adjustment of historical loss rates.

The Company monitors available credit on large lines to identify any off-balance sheet credit risks that may arise. Available credit lines are also taken into consideration for loans that are individually tested for impairment amounts. Any lines for which there is insufficient collateral or other sources of repayment will have impairment amounts accrued for deficiencies above the amount of the outstanding loan balance. The Company generally has the contractual right to suspend available credit on a commitment when a contractual default occurs. Available lines are generally suspended, except for the completion of construction projects, when loans are restructured. The Company did not have a liability accrued for any off-balance sheet credit risks at September 30, 2012 or December 31, 2011.

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.

Concentrations of Credit

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

10

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1:  (Continued)

Restricted Cash Balances

The Company has entered into an interest rate swap agreement designed to convert floating rate interest payments on subordinated debentures into fixed rate payments. The Company had pledged interest bearing bank balances as collateral to the interest rate swap counterparty in the amounts of $1.873 million at September 30, 2012 and $1.861 million at December 31, 2011.

The Company held $100 thousand in certificates of deposit and $401 thousand in other interest bearing bank balances at September 30, 2012 and $100 thousand in certificates of deposit and $100 thousand in other interest bearing bank balances at December 31, 2011 in commercial banks as compensating balances for a third party credit card originator and a third party debit card processor. The amounts are included in interest-bearing bank balances.

Note 2:  Fair Value

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

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

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

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

11

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements at September 30, 2012, Using
	Assets/Liabilities Measured at  Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	72,833	$	—	$	72,833	$	—
Mortgage-backed investments	203,659		—		203,659		—
Obligations of states and political subdivisions	63,816		—		63,816		—
Collateralized debt obligations	855		—		—		855
Other debt securities	13,025		—		13,025		—
Total securities available for sale	$	354,188	$	—	$	353,333	$	855
Mortgage derivative assets	862		—		—		862
	$	355,050	$	—	$	353,333	$	1,717
Interest rate swap liability	$	2,653	$	—	$	—	$	2,653
Mortgage derivative liabilities	501		—		—		501
	$	3,154	$	—	$	—	$	3,154

			Fair Value Measurements at December 31, 2011, Using
	Assets/Liabilities Measured at  Fair Value		Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
U.S. Government sponsored entities	$	58,792	$	—	$	58,792	$	—
Mortgage-backed investments	203,686		—		203,686		—
Obligations of states and political subdivisions	54,142		—		54,142		—
Collateralized debt obligations	819		—		—		819
Other debt securities	3,335		—		3,335		—
Total available for sale securities	$	320,774	$	—	$	319,955	$	819
Mortgage derivative assets	269		—		—		269
	$	321,043	$	—	$	319,955	$	1,088
Interest rate swap liability	$	1,834	$	—	$	—	$	1,834
Mortgage derivative liabilities	291		—		—		291
	$	2,125	$	—	$	—	$	2,125

12

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

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

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

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

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

Mortgage Derivatives. Mortgage derivative assets and liabilities represent the fair values of the interest rate lock commitments (IRLCs) of the Company to originate mortgages at certain rates as well as the commitments, or forward sale agreements (FSAs), to sell the mortgages to investors at locked prices within a specified period of time. The Company uses an internal valuation model with observable market data inputs consisting primarily of dealer quotes, market yield curves and estimated servicing values, and non-observable inputs such as credit-related adjustments and estimated pull-through rates. These instruments are classified as Level 3 fair values. Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s statement of condition.

Interest rate swap. The interest rate swap is valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using a rate derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

13

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

The following table reports the activity for the third quarter and first nine months of 2012 and 2011 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

(Dollars in thousands)	Three Months Ended									Nine Months Ended
	September 30, 2012									September 30, 2012
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap
Beginning Balance	$	850		$	272		$	(2,349	)	$	819		$	(22	)	$	(1,834	)
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(25		)	—			—			(29		)	—			—
Other-than-temporary impairment (included in) transferred from other comprehensive income	25			—			—			21			—			—
Other gains/losses included in other comprehensive income	5			—			(457		)	44			—			(1,269		)
Net swap settlement recorded	—			—			153			—			—			450
IRLC and FSA issuances	—			767			—			—			862			—
IRLC and FSA expirations and fair value changes included in earnings	—			(441		)	—			—			(391		)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(237		)	—			—			(88		)	—
Ending Balance	$	855		$	361		$	(2,653	)	$	855		$	361		$	(2,653	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(25	)	$	—		$	(153	)	$	(29	)	$	—		$	(450	)

	Three Months Ended									Nine Months Ended
(Dollars in thousands)	September 30, 2011									September 30, 2011
	Collateralized Debt Obligations			Mortgage Derivatives			Interest Rate Swap			Collateralized Debt Obligations			Mortgage Derivatives		Interest Rate Swap
Beginning Balance	$	946		$	34		$	103		$	934		218		$	817
Total gains or losses (realized/unrealized):
Other-than-temporary impairment included in earnings	(200		)	—			—			(581		)	—		—
Other-than-temporary impairment (included in) transferred from other comprehensive income	71			—			—			214			—		—
Other gains/losses included in other comprehensive income	(87		)	—			(2,001		)	163			—		(2,908		)
Net swap settlement recorded	—			—			169			—			—		362
IRLC and FSA issuances	—			171			—			—			377		—
IRLC and FSA expirations and fair value changes included in earnings	—			81			—			—			(146	)	—
IRLC transfers into closed loans/FSA transferred on sales	—			(155		)	—			—			(318	)	—
Ending Balance	$	730		$	131		$	(1,729	)	$	730		131		$	(1,729	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(200	)	$	—		$	(169	)	$	(581	)	—		$	(362	)

14

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 fair value measurements.

	Fair Value at			Valuation	Unobservable			Weighted
(Dollars in thousands)	September 30, 2012			Techniques	Inputs	Range		Average
Collateralized debt obligations	$	855		Discounted cash flow	Discount margin Default rates	15.00% - 25.00% 0.25% - 1.20%		18.15% .57%
Mortgage interest rate lock agreements	665			Discounted cash flow	Pull-through rates	85.00	%	85.00	%
Mortgage forward sale agreements	(304		)	Consensus pricing	Pull-through rates	85.00	%	85.00	%
Interest rate swap	(2,653		)	Discounted cash flow	Discount rate	.31% - .85%		0.50	%

Collateralized debt obligations: The discount margins for the collateralized debt obligations is the margin added to the LIBOR yield curve. The margins are based on averages of observed market transactions for similar preferred securities and adjusted to reflect the lack of liquidity in the trust preferred CDO market. The default rates are annual rates based on a credit scoring analysis of the underlying collateral issuers. The default rates are used in estimating the timing and amounts of expected cash flows.

Mortgage interest rate lock agreements: The pull-through rate is estimated based on closing activity from a sample time period. The pull-though rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Mortgage forward sale agreements: The pull-through rate is estimated based on data provided by mortgage investors. The pull-through rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Interest rate swap: A LIBOR swap yield curve is used to discount the expected cash flows. The yield curve is constructed from swap quotes derived by a third party.

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	09/30/12 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	21,243	$	—	$	—	$	21,243
Loan foreclosures	1,901		—		—		1,901
Other real estate	7,503		—		—		7,503

15

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	12/31/11 (a)		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	15,533	$	—	$	—	$	15,533
Loan foreclosures	11,304		—		—		11,304
Other real estate	13,788		—		—		13,788

(a) These amounts represent the resulting carrying amounts on the consolidated statement of condition for impaired real estate-secured loans and other real estate for which fair value re-measurements took place during the period. Loan foreclosures represent the fair value portion of the carrying amounts of other real estate properties that were re-measured at the point of foreclosure during the period.

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 nonrecurring fair value measurements.

	Fair Value at		Valuation	Unobservable		Weighted
(Dollars in thousands)	September 30, 2012		Techniques	Inputs	Range	Average
Impaired loans	$	21,243	Appraisals from comparable properties	Adjustments for market conditions since appraisal	$2 thousand - $490 thousand	$60 thousand
Loan foreclosures	1,901		Appraisals from comparable properties	Adjustments for market conditions since appraisal	$1 thousand - $91 thousand	$24 thousand
Other real estate	7,503		Appraisals from comparable properties	Adjustments for market conditions since appraisal	$1 thousand - $526 thousand	$95 thousand

Collateral dependent loans and foreclosed properties are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. These valuations are updated by appraisal staff using an internal database of factors. The values of foreclosed properties may also be revised when sale discussions indicate or when sale contracts are negotiated that require an additional write-down to the buyers' expectations.

16

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

	Three Months Ended				Nine Months Ended
	September 30				September 30
(Dollars in thousands)	2012		2011		2012		2011
Impaired loans (a)	$	1,331	$	1,805	$	6,773	$	6,221
Loan foreclosures (b)	282		1,904		1,785		2,721
Other real estate (c)	645		670		2,281		3,777

(a) Represents additional impairments on loans which are based on the appraised value of the collateral. These impairments are accrued in the allowance for loan losses and charged to provision for loan loss expense.

(b) Represents foreclosures of loans secured by real estate when the foreclosed value is lower than the carrying value of the loan. These amounts are charged to the allowance for loan losses with the fair value of the foreclosed property being recorded in other real estate.

(c) Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Impaired Loans. Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data and other internal estimates.

Loan Foreclosures. Certain foreclosed assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on appraisals, observable market data and other internal estimates.

Other real estate. Other real estate consists primarily of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers recent appraisals when available, what other properties have sold for, how long properties have been on the market, the condition of the property, the availability of liquid buyers and other assumptions that market participants may use in determining a price at which they would acquire the property. Since certain significant inputs to these estimates are management-derived and unobservable, fair values are reported as using Level 3 inputs.

17

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011:

							Fair Value Measurements at September 30, 2012, Using
	September 30, 2012						Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Carrying			Estimated
	Amount			Fair Value			(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and short-term investments	$	84,382		$	84,382		$	84,382	$	—	$	—
Securities available for sale	354,188			354,188			—		353,333		855
Loans held for sale	23,548			24,450			—		—		24,450
Loans held for investment	970,671			900,750			—		—		900,750
Agency accounts receivable	322			322			322		—		—
Accrued interest receivable	6,123			6,123			14		1,668		4,441
Nonmarketable equity investments	2,197			2,197			—		—		2,197
Investments in unconsolidated VIEs	3,209			3,209			—		—		3,209
Mortgage derivative assets	862			862			—		—		862
Financial liabilities:
Noninterest-bearing deposits	233,684			233,684			233,684		—		—
NOW, MMDA and savings deposits	720,395			720,395			720,395		—		—
Certificates of deposit	395,395			401,738			—		—		401,738
Short-term borrowings	5,225			5,225			5,225		—		—
Other borrowings	38,984			40,600			—		—		40,600
Junior subordinated debt	30,928			25,224			—		—		25,224
Agency accounts payable	859			859			859		—		—
Accrued interest payable	806			806			51		—		755
Mortgage derivative liabilities	501			501			—		—		501
Other financial instruments:
Commitments to extend credit and letters of credit	(5		)	(340		)	—		—		(340		)
Interest rate swap	(2,653		)	(2,653		)	—		—		(2,653		)

18

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

	December 31, 2011
(Dollars in thousands)	Carrying Amount			Estimated Fair Value
Financial assets:
Cash and short-term investments	$	104,367		$	104,367
Securities available for sale	320,774			320,774
Loans held for sale	26,073			27,053
Loans held for investment	981,387			921,351
Agency accounts receivable	217			217
Accrued interest receivable	6,122			6,122
Nonmarketable equity investments	7,380			7,380
Investments in unconsolidated VIEs	3,425			3,425
Mortgage derivative assets	269			269
Financial liabilities:
Noninterest-bearing deposits	231,718			231,718
NOW, MMDA and savings deposits	707,798			707,798
Certificates of deposit	431,947			439,518
Short-term borrowings	4,398			4,398
Other borrowings	43,001			45,193
Junior subordinated debt	30,928			25,204
Agency accounts payable	641			641
Accrued interest payable	1,023			1,023
Mortgage derivative liabilities	291			291
Other financial instruments:
Commitments to extend credit and letters of credit	(4		)	(320		)
Interest rate swap	(1,834		)	(1,834		)

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

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

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. An external pricing service is used to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. The price per instrument provided by the pricing service is used and not adjusted. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use a third-party value provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s valuation system uses prices provided by (1) the same external pricing service that the Company uses, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At September 30, 2012, the only securities that were not priced by the primary provider were 10 municipal bonds representing 5 issuers and the collateralized debt obligations. The broker-dealer’s matrix prices were used for the municipal securities and a third-party provider’s modeled prices were used for the collateralized debt obligations (CDOs).

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

The primary method of validation of investment security values is the comparison of the prices that are received from the primary pricing service provider with the prices that are used in the broker-dealer’s valuation system. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs are validated by comparing the fair values with market activity of similar instruments. Management reviews the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are reasonable.

19

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 2:  (Continued)

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

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

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

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

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

Investments in unconsolidated VIEs are the Company’s investment in the First M&F Statutory Trust I, which acquired the Company’s junior subordinated debt through funding provided by the issuance of trust preferred securities, and an investment in a low income housing tax credit entity. The investment in the statutory trust depends on the Company’s own cash flows and therefore, the carrying value is an accurate approximation of fair value. The low income housing tax credit investment is a limited partnership interest for which the carrying value is assumed to be a reasonable estimate of its fair value. These investments are carried in other assets in the statement of condition.

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

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

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

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

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

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

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

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

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

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

The interest rate swap is being used to hedge the interest cash flows on the Company’s junior subordinated debentures. It is valued using a discounted cash flow methodology with cash flows being estimated from the 3-month LIBOR curve and discount rates derived from the swap curve.

20

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3:  Investment Securities

The following is a summary of the amortized cost and fair value of securities available for sale at September 30, 2012 and December 31, 2011:

			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value
September 30, 2012:
U.S. Government sponsored entities	$	71,883	$	952	$	2	$	72,833
Mortgage-backed investments	197,675		6,108		124		203,659
Obligations of states and political subdivisions	60,512		3,334		30		63,816
Collateralized debt obligations	3,108		—		2,253		855
Other debt securities	12,779		257		11		13,025
	$	345,957	$	10,651	$	2,420	$	354,188
December 31, 2011:
U.S. Government sponsored entities	$	58,714	$	174	$	96	$	58,792
Mortgage-backed investments	198,832		5,016		162		203,686
Obligations of states and political subdivisions	51,763		2,459		80		54,142
Collateralized debt obligations	3,137		—		2,318		819
Other debt securities	3,444		25		134		3,335
	$	315,890	$	7,674	$	2,790	$	320,774

Provided below is a summary of securities available for sale which were in an unrealized loss position and the length of time that individual securities have been in a continuous loss position at September 30, 2012 and December 31, 2011. Securities on which we have taken only credit-related other-than-temporary-impairment (OTTI) write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the amortized cost basis and not the period of time since the OTTI write-down.

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2012:
U.S. Government sponsored entities	$	1,499	$	2	$	—	$	—	$	1,499	$	2
Mortgage-backed investments	11,550		124		—		—		11,550		124
Obligations of states and political subdivisions	3,489		30		—		—		3,489		30
Collateralized debt obligations	—		—		855		2,253		855		2,253
Other debt securities	—		—		2,453		11		2,453		11
	$	16,538	$	156	$	3,308	$	2,264	$	19,846	$	2,420
December 31, 2011:
U.S. Government sponsored entities	$	23,734	$	96	$	—	$	—	$	23,734	$	96
Mortgage-backed investments	32,280		162		—		—		32,280		162
Obligations of states and political subdivisions	7,613		80		—		—		7,613		80
Collateralized debt obligations	—		—		819		2,318		819		2,318
Other debt securities	2,317		134		—		—		2,317		134
	$	65,944	$	472	$	819	$	2,318	$	66,763	$	2,790

21

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3:  (Continued)

At September 30, 2012, there were 2 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 8 mortgage-backed securities with unrealized losses less than 12 months. There were 11 municipal securities with unrealized losses less than 12 months. There were no corporate securities with unrealized losses less than 12 months and 2 corporate securities with unrealized losses more than 12 months. The unrealized losses associated with the U.S. government sponsored entity, mortgage-backed and corporate securities were primarily driven by changes in market rates and not due to the credit quality of the securities. Of the two corporate securities that had unrealized losses extending more than twelve months, one with an unrealized loss of $12 thousand had actually improved its position from a December 31, 2011 unrealized loss of $104 thousand. The municipal securities that were in unrealized loss positions for less than a year were in unrealized loss positions due primarily to fluctuations in interest rates and market liquidity. A review of the municipal securities portfolio did not indicate any credit deterioration.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. Management has evaluated these instruments for impairment as of each quarter end within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required management to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. Credit downgrades of the beneficial interests are also factored in when determining whether the impairments in these securities are other-than-temporary. The discounted cash flow estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities (the CDO collateral) of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations is determined based on an analysis of the financial condition of the banks. Generally, the same factors that result in credit rating downgrades of the beneficial interests also result in negative adjustments to the expected cash flows of the underlying collateral. This analysis results in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests if certain collateral coverage ratios are not maintained, with the remaining amounts eventually flowing through to the interests owned by the Company. Based on this type of analysis for each beneficial interest issuer, the cash flows of each of the five beneficial interests owned by the Company are projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis has resulted in other-than-temporary impairment (OTTI) conditions for all five of the securities since 2008. During the third quarter of 2011, two of the securities incurred other-than-temporary impairments that resulted in $200 thousand in credit-related losses being charged against earnings with the remaining non-credit-related losses being charged to other comprehensive income. During the third quarter of 2012, one of the securities incurred an other-than-temporary impairment of $25 thousand. Management believes that as the economy improves, the deferrals related to the CDO collateral will cure and provide enough cash flows to the CDOs for the Company to recover its adjusted book values.

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

The following table provides a roll forward of the cumulative activity related to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30				September 30
	2012		2011		2012		2011
Beginning balance	$	1,867	$	1,613	$	1,863	$	1,232
OTTI credit losses on previously impaired securities	25		200		29		581
Ending balance	$	1,892	$	1,813	$	1,892	$	1,813

The fair values of our CDOs could decline in the future if the underlying performance of the collateral for the trust preferred CDOs deteriorates and credit enhancements in the form of seniority in the cash flow waterfalls do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that additional OTTI may occur in the future if the economy deteriorates.

22

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 3:  (Continued)

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

	Three Months Ended					Nine Months Ended
(Dollars in thousands)	September 30					September 30
	2012			2011		2012		2011
Proceeds from sales	$	15,954		$	28,430	$	49,936	$	89,504
Gross realized gains	—			463		688		2,209
Gross realized losses	27			3		123		59
Net gains (losses) from sales	$	(27	)	$	460	$	565	$	2,150
Gross recognized losses related to the credit component of other-than-temporary impairments	$	25		$	200	$	29	$	581

Realized gains and losses on securities available for sale are determined using the specific amortized cost of the securities sold.

Securities with a carrying value totaling $210.327 million at September 30, 2012 and $211.988 million at December 31, 2011 were pledged to secure an interest rate swap, public deposits, short-term borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of debt securities available for sale at September 30, 2012, 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. Mortgage-backed securities receive monthly payments based on the cash flows of the underlying collateral. Therefore, their stated maturities do not represent the timing of principal amounts received and no maturity distributions are shown for these securities.

(Dollars in thousands)	Amortized Cost		Fair Value
One year or less	$	15,433	$	15,594
After one through five years	80,991		82,995
After five through ten years	36,392		38,213
After ten years	15,466		13,727
	148,282		150,529
Mortgage-backed investments	197,675		203,659
	$	345,957	$	354,188

23

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $1.074 million at September 30, 2012 and $2.045 million at December 31, 2011:

(Dollars in thousands)	September 30, 2012		December 31, 2011
Construction and land development loans	$	57,613	$	69,325
Other commercial real estate loans	496,862		505,180
Asset-based loans	42,436		37,540
Other commercial loans	113,454		117,790
Home equity loans	37,196		37,024
Other 1-4 family residential loans	197,629		186,815
Consumer loans	42,137		42,666
Total loans	$	987,327	$	996,340

The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $9.914 million and $18.005 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at September 30, 2012 and December 31, 2011 respectively. Approximately $157.556 million and $216.201 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at September 30, 2012 and December 31, 2011, respectively.

During the first nine months of 2011 the Company purchased $821 thousand in commercial real estate loan participations. During the first nine months of 2012 the Company purchased $4.849 million in agricultural loan participations and $3.261 million in commercial real estate participations.

During the first nine months of 2012 the Company transferred $6.576 million of mortgage loans from held-for-sale status into the portfolio of loans held for investment. During the first nine months of 2011 the Company transferred $454 thousand of mortgage loans from held-for-sale status into the portfolio of loans held for investment.

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at September 30, 2012:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Construction and land development loans	$	544	$	64	$	1,023	$	1,631	$	55,982	$	57,613	$	—
Other commercial real estate loans	15,726		22		1,988		17,736		479,126		496,862		172
Asset based loans	—		—		—		—		42,436		42,436		—
Other commercial loans	123		162		339		624		112,830		113,454		152
Home equity loans	139		—		10		149		37,047		37,196		10
Other 1-4 family residential loans	1,813		429		468		2,710		194,919		197,629		67
Consumer loans	115		72		10		197		41,940		42,137		7
Total	$	18,460	$	749	$	3,838	$	23,047	$	964,280	$	987,327	$	408

24

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2011:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
Construction and land development loans	$	603	$	—	$	4,172	$	4,775	$	64,550	$	69,325	$	72
Other commercial real estate loans	2,194		679		9,792		12,665		492,515		505,180		279
Asset based loans	—		—		—		—		37,540		37,540		—
Other commercial loans	546		442		419		1,407		116,383		117,790		50
Home equity loans	121		37		141		299		36,725		37,024		—
Other 1-4 family residential loans	2,978		303		981		4,262		182,553		186,815		174
Consumer loans	214		67		41		322		42,344		42,666		27
Total	$	6,656	$	1,528	$	15,546	$	23,730	$	972,610	$	996,340	$	602

Loans are placed into nonaccrual status when, in management's opinion, the borrowers may be unable to meet their payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. The following table presents a summary of the nonaccrual status of loans by type at September 30, 2012 and December 31, 2011 and other nonperforming assets:

(Dollars in thousands)	September 30, 2012		December 31,  2011
Construction and land development loans	$	1,465	$	4,398
Other commercial real estate loans	2,658		9,937
Asset based loans	—		—
Other commercial loans	613		913
Home equity loans	98		474
Other 1-4 family residential loans	1,369		1,422
Consumer loans	16		33
Total nonaccrual loans	$	6,219	$	17,177
Other real estate owned	28,002		36,952
Total nonperforming credit-related assets	$	34,221	$	54,129

The Company applies internal risk ratings to all loans. The risk ratings range from 10, which is the highest quality rating, to 70, which indicates an impending charge-off. The following definitions apply to the internal risk ratings:

Risk rating 10 – Excellent:

Commercial – Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

Consumer – This grade is reserved for loans secured by cash collateral on deposit at the Bank with no risk of principal deterioration.

Risk rating 20 – Strong:

Commercial and Consumer – This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

25

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

Risk rating 30 – Good:

Commercial – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and they: (1) conform to Bank policy, (2) conform to underwriting standards and (3) conform to product guidelines.

Risk rating 31 – Moderate:

Commercial – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions – any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors, (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Consumer loans exhibiting this grade may have up to two mitigated guideline tolerances or exceptions.

Risk rating 32 – Fair:

Commercial – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics: (1) additional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank – although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors, (2) unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time – repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance and (3) marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Consumer loans exhibiting this grade generally have three or more mitigated guideline tolerances or exceptions.

Risk rating 40 – Special Mention:

Commercial – Special Mention loans include the following characteristics: (1) loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Consumer - Special Mention loans include the following characteristics: (1) loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

26

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

Risk rating 50 – Substandard:

Commercial and Consumer – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower’s declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

Risk rating 60 – Doubtful:

Commercial and Consumer – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: (1) injection of capital, (2) alternative financing and (3) liquidation of assets or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been considered for non-accrual status, and the repayment schedule is questionable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

Risk rating 70 – Loss:

Commercial and Consumer – Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets should be charged against the Reserve for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

The following table presents a summary of loans by credit risk rating at September 30, 2012.

(Dollars in thousands)
	Construction		Other Commercial Real Estate		Asset-Based		Other Commercial
10 and 20	$	—	$	—	$	—	$	21,389
30-32	39,978		396,742		26,670		88,154
40	6,512		70,839		15,387		2,462
50	10,523		29,281		379		1,375
60	600		—		—		74
Total	$	57,613	$	496,862	$	42,436	$	113,454

(Dollars in thousands)
	Home Equity		Other 1-4  Family		Consumer		Total
10 and 20	$	—	$	59	$	13,070	$	34,518
30-32	35,313		181,556		28,361		796,774
40	729		9,366		567		105,862
50	1,154		6,558		137		49,407
60	—		90		2		766
Total	$	37,196	$	197,629	$	42,137	$	987,327

27

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table presents a summary of loans by credit risk rating at December 31, 2011.

(Dollars in thousands)
	Construction		Other Commercial Real Estate		Asset-Based		Other Commercial
10 and 20	$	—	$	—	$	—	$	11,085
30-32	45,982		406,498		29,296		103,359
40	5,185		57,912		7,096		1,802
50	13,059		40,770		1,148		1,466
60	5,099		—		—		78
Total	$	69,325	$	505,180	$	37,540	$	117,790

(Dollars in thousands)
	Home Equity		Other 1-4  Family		Consumer		Total
10 and 20	$	—	$	119	$	13,486	$	24,690
30-32	35,824		172,182		28,471		821,612
40	585		8,205		544		81,329
50	615		6,216		162		63,436
60	—		93		3		5,273
Total	$	37,024	$	186,815	$	42,666	$	996,340

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

During 2011 the Company changed the way that it calculated the historical loss rates that were applied to the various risk pools of loans in determining the allowance for loan losses for loans not individually tested for impairment. Loss rates are calculated by loan type including the major categories of construction and land development, 1-4 family residential, commercial real estate secured, commercial and industrial and consumer loans. The Company has historically used a conservatively adjusted thirteen year historical period for loss rates, believing that this time frame incorporated a broader range of economic and business cycles than a shorter time frame and gave a better estimate of expected losses. In September 2011, management began using a shorter historical period of five years, calculating a five year average loss rate by class of loan. This change was prompted by management and regulatory concerns about the current economic environment, observed industry changes and trends as well as management's view of the current business cycle and environment. Because of a conservative treatment of the former longer historic loss rate period - primarily by adjusting the thirteen year average loss rate by two standard deviations in an attempt to include low probability events in the loss rate - there was no material difference between it and the new five year convention. The five year convention is a straight historical average which naturally includes recent high-loss years. Given the immaterial difference in the two calculations, no adjustment was required to the provision for loan losses. Management does believe that going forward the five year historical loss calculation will better reflect the risks inherent in the recent and current credit environment and that it is more appropriate than an even shorter historical period (e.g., three years) because a shorter period would too heavily weight improved periods and too quickly remove recent periods that included larger losses caused by factors that could still reasonably exist latent in the makeup of the loan class.

The Company uses environmental factors to adjust loss rates to reflect economic conditions and other circumstances that imply risk of loss in the current environment that is not necessarily reflected in the historical loss rates. At December 31, 2011 the Company adjusted the five year loss rates by an economic environmental factor based on recessionary conditions and an illiquid market for undeveloped real estate collateral. The loss rate applied to commercial real estate loans was adjusted upward by 10 basis points. The loss rate applied to commercial, agricultural and municipal loans was adjusted upward by 50 basis points given their dependency on cash flows which are at risk absent a growing economy.

28

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

During the third quarter of 2012 the Company added environmental factors of approximately 10 basis points to commercial real estate loans and 25 basis points to commercial loans for economic uncertainty in the small business environment, reflective of slow sales growth in the Company's small business markets.

The following table summarizes loans that were individually reviewed for impairment allowances at September 30, 2012:

(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	6,915	$	9,269	$	—
Other commercial real estate loans	29,160		29,299		—
Asset based loans	—		—		—
Other commercial loans	967		967		—
Home equity loans	1,080		1,080		—
Other 1-4 family residential loans	5,092		5,191		—
Consumer loans	100		104		—
Loans with a specific valuation allowance:
Construction and land development loans	$	4,208	$	4,208	$	1,165
Other commercial real estate loans	15,145		16,555		2,182
Asset based loans	—		—		—
Other commercial loans	481		578		450
Home equity loans	74		74		36
Other 1-4 family residential loans	1,556		1,556		400
Consumer loans	39		39		39
Total:
Construction and land development loans	$	11,123	$	13,477	$	1,165
Other commercial real estate loans	44,305		45,854		2,182
Asset based loans	—		—		—
Other commercial loans	1,448		1,545		450
Home equity loans	1,154		1,154		36
Other 1-4 family residential loans	6,648		6,747		400
Consumer loans	139		143		39

29

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes the average recorded investment in impaired loans and the amount of interest income recognized for the third quarter and first nine months of 2012:

(Dollars in thousands)	Average Investment In Impaired Loans		Interest Income Recognized		Average Investment In Impaired Loans		Interest Income Recognized
	Quarter-to-Date		Quarter-to-Date		Year-to-Date		Year-to-Date
Loans without a specific valuation allowance:
Construction and land development loans	$	6,935	$	80	$	10,861	$	308
Other commercial real estate loans	24,168		266		31,291		1,110
Asset based loans	—		—		—		—
Other commercial loans	1,549		17		965		39
Home equity loans	1,831		15		1,102		29
Other 1-4 family residential loans	7,702		75		5,723		193
Consumer loans	272		4		171		9
Loans with a specific valuation allowance:
Construction and land development loans	$	2,978	$	38	$	3,981	$	139
Other commercial real estate loans	24,748		297		15,236		526
Asset based loans	—		—		—		—
Other commercial loans	42		5		477		12
Home equity loans	76		1		159		7
Other 1-4 family residential loans	832		4		1,917		53
Consumer loans	39		—		71		3
Total:
Construction and land development loans	$	9,913	$	118	$	14,842	$	447
Other commercial real estate loans	48,916		563		46,527		1,636
Asset based loans	—		—		—		—
Other commercial loans	1,591		22		1,442		51
Home equity loans	1,907		16		1,261		36
Other 1-4 family residential loans	8,534		79		7,640		246
Consumer loans	311		4		242		12

30

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at September 30, 2011:

(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	11,279	$	14,152	$	—
Other commercial real estate loans	33,835		36,452		—
Asset based loans	—		—		—
Other commercial loans	526		553		—
Home equity loans	384		384		—
Other 1-4 family residential loans	4,694		4,939		—
Consumer loans	120		146		—
Loans with a specific valuation allowance:
Construction and land development loans	$	12,936	$	16,630	$	2,350
Other commercial real estate loans	12,083		13,753		1,381
Asset based loans	—		—		—
Other commercial loans	1,373		1,475		614
Home equity loans	207		207		116
Other 1-4 family residential loans	1,749		1,771		569
Consumer loans	26		26		26
Total:
Construction and land development loans	$	24,215	$	30,782	$	2,350
Other commercial real estate loans	45,918		50,205		1,381
Asset based loans	—		—		—
Other commercial loans	1,899		2,028		614
Home equity loans	591		591		116
Other 1-4 family residential loans	6,443		6,710		569
Consumer loans	146		172		26

31

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes the average recorded investment in impaired loans and the amount of interest income recognized for the third quarter and first nine months of 2011:

(Dollars in thousands)	Average Investment In Impaired Loans		Interest Income Recognized		Average Investment In Impaired Loans		Interest Income Recognized
	Quarter-to-Date		Quarter-to-Date		Year-to-Date		Year-to-Date
Loans without a specific valuation allowance:
Construction and land development loans	$	9,131	$	147	$	12,952	$	394
Other commercial real estate loans	34,221		384		34,193		1,158
Asset based loans	—		—		—		—
Other commercial loans	1,486		4		2,567		83
Home equity loans	—		—		389		4
Other 1-4 family residential loans	7,927		119		4,747		184
Consumer loans	—		—		166		14
Loans with a specific valuation allowance:
Construction and land development loans	$	10,497	$	106	$	13,283	$	299
Other commercial real estate loans	3,450		67		12,205		114
Asset based loans	—		—		—		—
Other commercial loans	1,214		29		2,672		91
Home equity loans	614		1		207		1
Other 1-4 family residential loans	—		—		1,754		44
Consumer loans	—		—		30		1
Total:
Construction and land development loans	$	19,628	$	253	$	26,235	$	693
Other commercial real estate loans	37,671		451		46,398		1,272
Asset based loans	—		—		—		—
Other commercial loans	2,700		33		5,239		174
Home equity loans	614		1		596		5
Other 1-4 family residential loans	7,927		119		6,501		228
Consumer loans	—		—		196		15

32

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2011:

(Dollars in thousands)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	9,539	$	13,915	$	—
Other commercial real estate loans	33,048		36,117		—
Asset based loans	—		—		—
Other commercial loans	433		460		—
Home equity loans	159		159		—
Other 1-4 family residential loans	4,466		4,732		—
Consumer loans	128		154		—
Loans with a specific valuation allowance:
Construction and land development loans	$	8,620	$	11,294	$	1,750
Other commercial real estate loans	7,722		8,471		894
Asset based loans	—		—		—
Other commercial loans	1,111		1,111		485
Home equity loans	456		456		166
Other 1-4 family residential loans	1,843		1,843		397
Consumer loans	37		37		37
Total:
Construction and land development loans	$	18,159	$	25,209	$	1,750
Other commercial real estate loans	40,770		44,588		894
Asset based loans	—		—		—
Other commercial loans	1,544		1,571		485
Home equity loans	615		615		166
Other 1-4 family residential loans	6,309		6,575		397
Consumer loans	165		191		37

33

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for the nine months ended September 30, 2012 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,131		$	4,073		$	3,347		$	2,607		$	795		$	—	$	14,953
Provision charged to expense	701			4,199			631			741			268			—		6,540
Losses charged off	(1,594		)	(2,810		)	(667		)	(925		)	(560		)	—		(6,556		)
Recoveries	754			288			130			369			178			—		1,719
Balance, end of period	$	3,992		$	5,750		$	3,441		$	2,792		$	681		$	—	$	16,656
Ending balance:
Individually evaluated for impairment	$	1,165		$	2,182		$	450		$	436		$	39		$	—	$	4,272
Ending balance:
Collectively evaluated for impairment	$	2,827		$	3,568		$	2,991		$	2,356		$	642		$	—	$	12,384
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	57,613		$	496,862		$	155,890		$	234,825		$	42,137		$	—	$	987,327
Ending balance:
Individually evaluated for impairment	$	11,123		$	44,305		$	1,448		$	7,802		$	139		$	—	$	64,817
Ending balance:
Collectively evaluated for impairment	$	46,490		$	452,557		$	154,442		$	227,023		$	41,998		$	—	$	922,510
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

The following table summarizes activity in the allowance for loan losses for the three months ended September 30, 2012 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,148		$	4,776		$	3,023		$	2,792		$	571		$	—	$	15,310
Provision charged to expense	(234		)	1,053			580			315			266			—		1,980
Losses charged off	(88		)	(226		)	(188		)	(329		)	(204		)	—		(1,035		)
Recoveries	166			147			26			14			48			—		401
Balance, end of period	$	3,992		$	5,750		$	3,441		$	2,792		$	681		$	—	$	16,656

The provision expense for construction loans was negative for the third quarter of 2012 as the pool of loans collectively evaluated for impairment decreased by $9.952 million from the prior quarter end and as recoveries exceeded charge-offs for the quarter.

34

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for the nine months ended September 30, 2011 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	3,942		$	2,763		$	4,442		$	3,701		$	1,177		$	—	$	16,025
Provision charged to expense	1,891			3,798			908			693			150			—		7,440
Losses charged off	(1,672		)	(2,503		)	(2,227		)	(1,920		)	(686		)	—		(9,008		)
Recoveries	929			276			172			130			147			—		1,654
Balance, end of period	$	5,090		$	4,334		$	3,295		$	2,604		$	788		$	—	$	16,111
Ending balance:
Individually evaluated for impairment	$	2,350		$	1,381		$	614		$	685		$	26		$	—	$	5,056
Ending balance:
Collectively evaluated for impairment	$	2,740		$	2,953		$	2,681		$	1,919		$	762		$	—	$	11,055
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Loans:
Ending balance	$	83,100		$	520,804		$	143,133		$	223,884		$	44,045		$	—	$	1,014,966
Ending balance:
Individually evaluated for impairment	$	24,215		$	45,918		$	1,899		$	7,034		$	146		$	—	$	79,212
Ending balance:
Collectively evaluated for impairment	$	58,885		$	474,886		$	141,234		$	216,850		$	43,899		$	—	$	935,754
Ending balance:
Loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

The following table summarizes activity in the allowance for loan losses for the three months ended September 30, 2011 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,620		$	4,102		$	5,282		$	3,682		$	1,119		$	—	$	18,805
Provision charged to expense	1,764			1,706			(890		)	127			(127		)	—		2,580
Losses charged off	(1,341		)	(1,486		)	(1,132		)	(1,214		)	(246		)	—		(5,419		)
Recoveries	47			12			35			9			42			—		145
Balance, end of period	$	5,090		$	4,334		$	3,295		$	2,604		$	788		$	—	$	16,111

35

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table summarizes the balance in the allowance for loan losses at December 31, 2011 by loan category:

(Dollars in thousands)
	Construction		Other CRE		Commercial		Residential		Consumer		Unallocated		Total
Balance December 31, 2011	$	4,131	$	4,073	$	3,347	$	2,607	$	795	$	—	$	14,953
Balance December 31, 2011:
Individually evaluated for impairment	$	1,750	$	894	$	485	$	563	$	37	$	—	$	3,729
Balance December 31, 2011:
Collectively evaluated for impairment	$	2,381	$	3,179	$	2,862	$	2,044	$	758	$	—	$	11,224
Balance December 31, 2011:
Loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans:
Balance December 31, 2011:	$	69,325	$	505,180	$	155,330	$	223,839	$	42,666	$	—	$	996,340
Balance December 31, 2011:
Individually evaluated for impairment	$	18,159	$	40,770	$	1,544	$	6,924	$	165	$	—	$	67,562
Balance December 31, 2011:
Collectively evaluated for impairment	$	51,166	$	464,410	$	153,786	$	216,915	$	42,501	$	—	$	928,778
Balance December 31, 2011:
Loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s restructured loan portfolio as of September 30, 2012 and December 31, 2011:

(Dollars in thousands)	September 30, 2012				December 31, 2011
	Recorded Balance		Allowance		Recorded Balance		Allowance
Restructured loans with an allowance:
Construction and land development loans	$	442	$	63	$	136	$	61
Other commercial real estate loans	4,571		922		4,018		320
Other commercial loans	238		238		387		117
Other 1-4 family residential loans	60		13		199		76
Restructured loans without an allowance:
Construction and land development loans	1,219		—		2,725		—
Other commercial real estate loans	11,483		—		17,002		—
Other commercial loans	79		—		119		—
Other 1-4 family residential loans	568		—		1,194		—
Total restructured loans	$	18,660	$	1,236	$	25,780	$	574

At September 30, 2012, there were no available credit commitments for restructured loans. At December 31, 2011, there were $356 thousand in available credit commitments for construction and land development restructured loans.

36

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

There were no loans restructured during the third quarter of 2012 or during the first nine months of 2012. The following table summarizes the activity for troubled debt restructurings that occurred in the third quarter of 2011.

(Dollars in thousands)	Number of Loans Modified	Pre Modification Balance		Post Modification Balance
Interest Rate Modifications:
Construction and land development loans	1	$	465	$	463
Other commercial real estate loans	1	181		180
Total rate modifications	2	$	646	$	643
Term Extensions and Renewals:
Construction and land development loans	1	$	404	$	404
Other commercial real estate loans	1	109		109
Other commercial loans	—	—		—
Other 1-4 family residential loans	1	345		345
Total extensions and renewals	3	$	858	$	858
Total loans restructured	5	$	1,504	$	1,501

The following table summarizes the activity for troubled debt restructurings that occurred during the first nine months of 2011.

(Dollars in thousands)	Number of Loans Modified	Pre Modification Balance		Post Modification Balance
Interest Rate Modifications:
Construction and land development loans	3	$	1,156	$	1,125
Other commercial real estate loans	2	340		338
Other 1-4 family residential loans	3	158		157
Total rate modifications	8	$	1,654	$	1,620
Term Extensions and Renewals:
Construction and land development loans	4	$	2,987	$	2,987
Other commercial real estate loans	7	9,663		9,663
Other commercial loans	1	1,797		1,797
Other 1-4 family residential loans	2	496		496
Total extensions and renewals	14	$	14,943	$	14,943
Total loans restructured	22	$	16,597	$	16,563

37

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 4:  (Continued)

The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during the three and nine month periods ended September 30, 2012, that were initially restructured within the prior twelve months.

(Dollars in thousands)	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	Number of Loans	Amortized Cost		Number of Loans	Amortized Cost
Construction and land development loans	1	$	295	1	$	295
Other commercial loans	—	—		1	335
Other 1-4 family residential loans	1	38		3	342
Total subsequent defaults	2	$	333	5	$	972

The construction and land development loan for the third quarter and first nine months of 2012 was a foreclosure. Approximately $152 thousand of other 1-4 family residential loans for the first nine months of 2012 were foreclosures. The remaining defaults were 90 day delinquencies and all defaults were term extensions and renewals.

The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during the three and nine month periods ended September 30, 2011, that were initially restructured within the prior twelve months.

(Dollars in thousands)	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
	Number of Loans	Amortized Cost		Number of Loans	Amortized Cost
Construction and land development loans	2	$	1,951	2	$	1,951
Other commercial real estate loans	4	6,497		4	6,497
Other 1-4 family residential loans	3	155		3	155
Total subsequent defaults	9	$	8,603	9	$	8,603

The defaults for construction and land development loans for the third quarter and first nine months of 2011 defaults were foreclosures. Approximately $1.118 million of the defaults for other commercial real estate loans for the third quarter and first nine months of 2011 were foreclosures. The remaining balances were subsequent 90 day delinquencies.

Note 5:  Other Intangible Assets

Following is a summary of intangible assets, net of accumulated amortization, included in the consolidated statements of condition:

Core Deposit Intangible
	Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30						September 30
	2012			2011			2012			2011
Beginning Balance	$	4,373		$	4,799		$	4,586		$	5,013
Amortization expense	(107		)	(106		)	(320		)	(320		)
Ending Balance	$	4,266		$	4,693		$	4,266		$	4,693
Estimated future amortization expense
Remainder of 2012	$	107
2013	427
2014	427
2015	427
2016	427
2017	427

38

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 6:  Borrowing Arrangements

The following is a summary of other borrowings at September 30, 2012 and December 31, 2011:

(Dollars in thousands)	September 30 2012		December 31 2011
Company’s line of credit in the amount of $5,000,000, maturing in March 2013; secured by approximately 51% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%	$	2,917	$	3,292
Bank’s advances from Federal Home Loan Banks	36,067		39,709
	$	38,984	$	43,001
Company’s junior subordinated debentures, interest payable quarterly at 90-day LIBOR plus 1.33% through March 2036; currently redeemable	$	30,928	$	30,928

The Company’s revolving correspondent line of credit, as modified in March 2012, requires three principal payments of at least $125 thousand each – one during the second, third and fourth quarters of 2012. The line of credit contains certain restrictive covenants related to capital ratios, asset quality, returns on average assets, dividends and supervisory actions by the Company’s regulators. The Company was in compliance with the covenants at September 30, 2012.

The Bank has advances and letters of credit from the Federal Home Loan Bank of Dallas (FHLB) collateralized by real estate-secured loans. The Bank must pledge collateral to obtain advances from the FHLB. Based on the amount of collateral pledged as of September 30, 2012 the Bank had approximately $49.902 million in available credit.

The Bank has a line of credit with the Federal Reserve Discount Window collateralized by commercial and consumer loans. The bank had a line of credit of approximately $6.444 million at September 30, 2012, all of which was available.

In February 2006, the Company issued $30.928 million in fixed/floating rate junior subordinated deferrable interest debentures to First M&F Statutory Trust I. The Company received $30.000 million in cash and $928 thousand of common securities from the Trust. The debentures mature in March 2036 and interest is payable quarterly.

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

In November 2010 the Company entered into a forward-starting, pay-fixed, receive-floating interest rate swap with a notional value of $30 million designed to hedge the variability of interest payments when the junior subordinated debentures reset from a fixed rate of interest to a floating rate of interest on March 15, 2011. The interest rate swap payments became effective on March 15, 2011, and it terminates on March 15, 2018. The terms of the interest rate swap include fixed interest paid by the Company at a rate of 3.795% and floating interest paid based on 90-day LIBOR plus 1.33%. Based on its analysis, the Company expects the hedge to be highly effective.

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

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

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

39

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 7:  Preferred Stock and Common Stock Warrant

On February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S. Treasury as part of its participation in the Capital Purchase Program. Concurrent with the issuance of the preferred stock, the Company also issued a ten-year warrant to purchase up to 513,113 shares of the Company’s common stock at an exercise price of $8.77 per share to the U. S. Treasury. The Company received $30.000 million from the U. S. Treasury in exchange for the preferred stock and common stock warrant. Approximately $28.637 million of the proceeds were allocated to the preferred stock with the remaining $1.363 million being allocated to additional paid-in capital for the common stock warrant. Cumulative dividends on the Class B, Series A Preferred Stock accrued on the $1,000 liquidation preference at a rate of 5% per annum.

On September 29, 2010 the Company redeemed the Class B, Series A Preferred Stock by issuing 30,000 shares of Class B, Series CD Preferred Stock issued pursuant to the U. S. Treasury Community Development Capital Initiative. The book value of the Class B, Series A Preferred Stock on the exchange date was $29.026 million. The fair value of the Class B, Series CD Preferred Stock issued on the exchange date was $16.159 million, resulting in a gain of $12.867 million which was recorded as a credit to retained earnings. The Company’s banking subsidiary, M&F Bank, was certified by the U. S. Treasury as a Community Development Financial Institution (CDFI) on September 28, 2010.

Cumulative dividends on the Class B, Series CD Preferred Stock accrue on the $1,000 liquidation preference at a rate of 2% per annum for the first eight years, and at a rate of 9% per annum thereafter but are paid only if, as, and when declared by the Company’s Board of Directors. The Company’s banking subsidiary must be re-certified as a Community Development Financial Institution (CDFI) by the Community Development Financial Institution Fund of the U. S. Treasury Department at three-year intervals. In the event that the banking subsidiary continues to be uncertified for 180 days, the dividend rate shall increase to 5%. If the banking subsidiary continues to be uncertified for an additional 90 days, then the dividend rate shall increase to 9% until the subsidiary becomes certified, at which time the dividend rate shall revert to its original 2% per annum. The Class B, Series CD Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Class B, Series CD Preferred Stock is generally non-voting.

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

The fair value of the Class B, Series CD Preferred Stock was determined using a discounted cash flow analysis. Cash flows under scenarios of continuing CDFI certification and loss of CDFI certification, weighted by estimated probabilities, were used. Terminal values were calculated as perpetuities on the dates that the dividend rates would accelerate to 9% under the different scenarios. All cash flows were discounted at a market rate of 10%.

Accretion of the discount associated with the preferred stock is recognized as an increase to preferred stock dividends in determining net income available to common shareholders. The discount on the Class B, Series A Preferred Stock was being accreted over a five year period using the effective yield method. The discount on the Class B, Series CD Preferred Stock is being accreted over an eight year period. The discount accretion recognized on the Class B, Series CD Preferred Stock was $870 thousand during the first nine months of 2011. The discount accretion recognized on the Class B, Series CD Preferred Stock was $964 thousand during the first nine months of 2012.

The following table summarizes preferred stock of the Company:

(Dollars in thousands)			Shares at		Shares at		Carrying Value
			September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
	Rate		Authorized	Outstanding	Authorized	Outstanding
Class A	—		1,000,000	—	1,000,000	—	$	—	$	—
Class B:			1,000,000		1,000,000
Series A	5	%		—		—	—		—
Series CD	2	%		30,000		30,000	18,528		17,564
							$	18,528	$	17,564

40

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 8:  Pension and Other Employee Benefit Plans

As discussed in Note 18: Employee Benefit Plans, to the December 31, 2011 financial statements, the Bank has a defined benefit pension plan covering substantially all full time employees of the Bank and its subsidiaries. The following table provides a summary of the components of the unamortized pension costs recognized in stockholders’ equity as of September 30, 2012 and December 31, 2011:

(Dollars in thousands)	Balance			2012			Balance
	12/31/11			Amortization			09/30/12
Unamortized actuarial loss	$	4,272		$	(1,602	)	$	2,670
Deferred taxes	(1,593		)	597			(996		)
Net unamortized pension costs	$	2,679		$	(1,005	)	$	1,674

The following is a summary of the components of net periodic benefit costs for the three and nine month periods ended September 30, 2012 and 2011:

	Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30						September 30
	2012			2011			2012			2011
Interest cost	$	103		$	112		$	307		$	336
Expected return on plan assets	(132		)	(140		)	(395		)	(422		)
Amortization of prior service costs	—			(7		)	—			(19		)
Recognized actuarial loss	534			246			1,602			738
Net pension cost	$	505		$	211		$	1,514		$	633

The Company made $226 thousand in contributions to the pension plan during the first nine months of 2012. The Company made $112 thousand in contributions to the pension plan during the first nine months of 2011. The Company expects to make approximately $236 thousand in contributions to the pension plan during the remainder of 2012.

The Company made $75 thousand in contributions to the ESOP and $500 thousand in matching contributions to the 401k plan during the first nine months of 2012. The Company made $75 thousand in contributions to the ESOP and $256 thousand in matching contributions to the 401k plan during the first nine months of 2011. During 2012 the Company matched 60% of an employee's first 6% of salary deferral in the 401k plan for all employees with less than three years of credited service and 75% for employees with three years or more of credited service. During the first half of 2011, the matching percentages were 30% and 37.5% respectively.

The Company has a nonqualified deferred compensation plan for certain senior officers. Participants deferred $60 thousand of compensation and received $12 thousand in distributions during the first nine months of 2012. Participants deferred $42 thousand of compensation and received $10 thousand in distributions during the first nine months of 2011. Employee benefit expenses include charges for earnings increases of $61 thousand for the first nine months of 2012 and $50 thousand for the first nine months of 2011. The plan incurred $3 thousand of expenses during the first nine months of 2012 and $3 thousand during the first nine months of 2011. Liabilities of the plan were $615 thousand at September 30, 2012 and $550 thousand at September 30, 2011, substantially all of which were vested.

41

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 9:  Share-based Compensation

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

The following table is a summary of stock awards activity:

	2005 Plan										1999 Plan
			Restricted Stock				Stock Options				Stock Options
	Shares Available For Grant		Number of Shares		Weighted Average Grant Date Fair Value		Number Of Shares		Weighted Average Exercise Price		Number Of Shares		Weighted Average Exercise Price
January 1, 2011	603,634		63,000		$	16.995	16,600		$	12.043	15,800		$	16.018
Awards Granted	(3,000	)	—		—		3,000		4.120		—		—
Vested	—		(6,000	)	16.855		—		—		—		—
Forfeitures	12,800		(11,000	)	16.915		(1,800	)	13.840		—		—
Expired	—		—		—		—		—		—		—
September 30, 2011	613,434		46,000		$	17.032	17,800		$	10.526	15,800		$	16.018
January 1, 2012	613,434		46,000		$	17.032	17,800		$	10.526	15,800		$	16.018
Awards Granted	(380,646	)	380,646		4.510		—		—		—		—
Vested	—		(37,000	)	17.075		—		—		—		—
Forfeitures	4,600		(4,000	)	4.510		(600	)	5.140		—		—
Expired	—		—		—		—		—		(5,000	)	12.625
September 30, 2012	237,388		385,646		$	4.798	17,200		$	10.714	10,800		$	17.590
Shares exercisable at September 30, 2012			—		—		11,800		$	13.055	10,800		$	17.590

The Company estimates a forfeiture rate of 9.45% (1.89% annual rate) for stock options issued to employees and a forfeiture rate of 5.45% (1.09% annual rate) for stock options issued to directors in determining net compensation costs. At September 30, 2012, there were $8 thousand in unrecognized compensation costs related to stock option awards.

The Company issues restricted stock awards to certain executives and other key employees. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. Dividends are paid quarterly to restricted stock grantees. In April2012 the Company granted 298,746 shares of restricted stock to certain officers and other employees. Also during April2012 the Company granted 130,000 shares of restricted stock to the directors of the Company who are not members of management. The grants to non-management directors were revised during the third quarter by the Board due to a limit on the number of shares that could be granted under the plan. The revised grants to non-management directors were 81,900 shares of restricted stock with a Board commitment to issue an additional 48,100 restricted shares in April 2013 pending shareholder approval of an increase in the director sublimit in the plan. As a sublimit under the plan, there are 100,000 shares available for awards to directors who are not employees of the Company at the time of the grant. At the time of the April2012 grants, 82,200 shares remained available for grants to such directors. The grants of 130,000 shares to non-employee directors would exceed the amount of shares currently available under the applicable sublimit. The Board proposes to amend the sublimit without affecting the total authorized shares under the plan and to seek shareholder approval of the proposed amendment. The amount of these grants in excess of the existing limitation - 48,100 shares in this case - are contingent on shareholder approval of the amendment. The April grants vest over a 5 year period and may be forfeited if the employee or director leaves before the completion of the vesting period. The 2012 stock grants do not contain any performance conditions. At September 30, 2012, there were $1.534 million in unrecognized compensation costs for all restricted stock grants. The unrecognized costs at September 30, 2012, are expected to be recognized over a weighted-average period of 4.45 years. The Company estimates that 4.00% (0.80% annual rate) of the employee shares and 2.00% (0.40% annual rate) of the director shares will be forfeited in determining net compensation expenses recognized.

In July 2010 the Board of Directors approved the reservation of 1,000,000 shares of authorized, unissued shares for issuance in lieu of cash for directors’ fees earned for 2010 and beyond. All shares are issued at market value and provide a convenient way for directors to receive shares of the Company based on the amount of directors’ fees that would otherwise be paid. Directors individually elect a percentage of their compensation, not less than 50%, to be received in common stock with the balance of the fees being paid in cash each quarter. For the third quarter of 2012, 5,994 shares were issued to directors in lieu of fees. For the first nine months of 2012, 23,156 shares were issued to directors in lieu of fees.

42

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 10:  Accumulated Other Comprehensive Income (Loss)

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

(Dollars in thousands)	Gross			Tax			Net
September 30, 2012:
Net unrealized gain on securities available for sale	$	10,484		$	3,910		$	6,574
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,253		)	(840		)	(1,413		)
Net unamortized pension costs	(2,670		)	(996		)	(1,674		)
Net unrealized loss on cash flow hedge	(2,653		)	(990		)	(1,663		)
	$	2,908		$	1,084		$	1,824
December 31, 2011:
Net unrealized gain on securities available for sale	$	7,202		$	2,688		$	4,514
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,318		)	(865		)	(1,453		)
Net unamortized pension costs	(4,272		)	(1,593		)	(2,679		)
Net unrealized loss on cash flow hedge	(1,834		)	(684		)	(1,150		)
	$	(1,222	)	$	(454	)	$	(768	)
September 30, 2011:
Net unrealized gain on securities available for sale	$	8,350		$	3,115		$	5,235
Net unrealized loss on other-than-temporarily impaired securities available for sale	(2,457		)	(916		)	(1,541		)
Net unamortized pension costs	(2,208		)	(824		)	(1,384		)
Net unrealized gain on cash flow hedge	(1,729		)	(645		)	(1,084		)
	$	1,956		$	730		$	1,226

Note 11:  Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $4.224 million at September 30, 2012 and $2.258 million at December 31, 2011. The reserve requirements were covered by vault cash of $13.364 million at September 30, 2012 and $12.311 million at December 31, 2011. The Company is also required to hold a clearing balance of $2.000 million with the Federal Reserve. This clearing balance was included in interest bearing bank balances at September 30, 2012 and December 31, 2011.

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

Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Total Capital and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of September 30, 2012, that all capital adequacy requirements have been met.

As of September 30, 2012, 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.

43

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 11:  (Continued)

The Company's and Bank's actual capital amounts and ratios as of September 30, 2012, and December 31, 2011, are also presented in the table:

(Dollars in thousands)	Actual				Minimum Capital				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2012:
Total capital (to risk weighted assets):
Company	$	149,994	12.76	%	$	94,239	8.00	%	$	—	—	%
Bank	147,353		12.56	%	93,881		8.00	%	117,352		10.00	%
Tier I capital (to risk weighted assets):
Company	135,277		11.51	%	47,119		4.00	%	—		—	%
Bank	132,659		11.30	%	46,941		4.00	%	70,411		6.00	%
Tier I capital (to average assets):
Company	135,277		8.81	%	61,414		4.00	%	—		—	%
Bank	132,659		8.67	%	61,175		4.00	%	76,469		5.00	%
December 31, 2011:
Total capital (to risk weighted assets):
Company	$	141,434	12.09	%	$	93,564	8.00	%	$	—	—	%
Bank	141,088		12.08	%	93,410		8.00	%	116,762		10.00	%
Tier I capital (to risk weighted assets):
Company	126,810		10.84	%	46,782		4.00	%	—		—	%
Bank	126,488		10.83	%	46,705		4.00	%	70,057		6.00	%
Tier I capital (to average assets):
Company	126,810		8.17	%	62,072		4.00	%	—		—	%
Bank	126,488		8.17	%	61,933		4.00	%	77,416		5.00	%

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

The Bank is required to obtain prior approval from its primary regulators – the Federal Deposit Insurance Corporation and the State of Mississippi Department of Banking and Consumer Finance – to pay dividends to the Company.

In November 2009, the Company entered into an informal agreement with the Federal Reserve Bank of St. Louis (the “Federal Reserve”). The agreement requires prior approval by the Federal Reserve of (1) the declaration or payment by the Company of dividends to shareholders and (2) the payment of interest on outstanding trust preferred securities and the payment of dividends on outstanding TARP preferred stock and (3) the incurrence of additional debt. The agreement is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended. The Federal Reserve approved, pursuant to the informal agreement, the common dividends payable to shareholders, the interest payment on the trust preferred securities and the dividends payable on the TARP preferred stock for the first nine months of 2012.

Under the terms of the Exchange Agreement related to the Company's participation in the TARP Community Development Capital Initiative, the Company may not pay common dividends in excess of the current rate of $.01 per share per quarter ($.04 per share per year) through the earlier of September 2018 or the date the preferred stock is redeemed.

44

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 12:  Income Taxes

Income tax expense was as follows:

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30				September 30
	2012		2011		2012		2011
Current income tax expense	$	—	$	1	$	2	$	3
Deferred income tax expense	645		390		1,754		797
Total income tax expense	$	645	$	391	$	1,756	$	800

Net deferred tax assets totaled $11.011 million at September 30, 2012 and $14.115 million at December 31, 2011. Management has reviewed its deferred tax assets and determined that it is more likely than not that the deferred tax assets will be realized in the foreseeable future and therefore no valuation allowance has been accrued.

In connection with its 2009 and 2010 operating losses and $7.895 million in taxable earnings for 2011, the Company had the following net operating losses and tax credits available for carryover for Federal income tax purposes at December 31, 2011:

(Dollars in thousands)
	Amount		Expiration  Dates
Net operating loss from 2009	$	6,805	2029
Net operating loss from 2010	4,321		2030
Tax credits from 2008	26		2028
Tax credits from 2009	57		2029
Tax credits from 2010	203		2030
Tax credits from 2011	377		2031
Alternative minimum tax credits from all years	738		indefinite lived

Federal tax credits for 2011 include a $120 thousand credit related to an adjustment to the amended tax returns for 2006 and 2007. The Company carried back more than the allowable net operating losses for alternative minimum tax purposes and therefore, owed approximately $184 thousand in alternative minimum tax for 2007. The tax due was accrued during the fourth quarter of 2011 and paid during the third quarter of 2012. The taxes paid, net of $64 thousand in credits that were available but not taken in the amended 2006 return, are available to be carried forward as tax credits.

The Company is currently being audited for the tax years of 2008 through 2010 by the Mississippi State Tax Commission. The audit is expected to be concluded by the end of 2012.

The Company had no material recognized uncertain tax positions as of September 30, 2012 or December 31, 2011 and therefore did not have any tax accruals in 2012 or 2011 related to uncertain positions. The Company is no longer subject to Federal income tax examinations of tax returns filed for years before 2008.

45

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 13:  Earnings Per Share

The Company calculates basic earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that its outstanding non-vested restricted stock awards are participating securities. Diluted earnings per share are calculated using the more dilutive of the two-class method and the treasury stock method.

The calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share were as follows:

	Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share data)	September 30				September 30
	2012		2011		2012		2011
Net income	$	1,794	$	1,330	$	5,154	$	3,386
Preferred dividends	479		448		1,413		1,320
Net income attributable to common stock	1,315		882		3,741		2,066
Net income allocated to common stockholders:
Distributed	92		89		276		273
Undistributed	1,172		789		3,353		1,781
	$	1,264	$	878	$	3,629	$	2,054
Weighted-average basic common and participating shares outstanding	9,599,721		9,184,872		9,452,463		9,177,590
Less: weighted average participating restricted shares outstanding	413,918		51,391		283,450		57,220
Weighted-average basic shares outstanding	9,185,803		9,133,481		9,169,013		9,120,370
Basic net income per share	0.14		0.10		0.40		0.23
Weighted-average basic common and participating shares outstanding	9,599,721		9,184,872		9,452,463		9,177,590
Add: share-based options and stock warrant	1,594		—		—		—
	9,601,315		9,184,872		9,452,463		9,177,590
Less: weighted average participating restricted shares outstanding	413,918		51,391		283,450		57,220
Weighted-average dilutive shares outstanding	9,187,397		9,133,481		9,169,013		9,120,370
Dilutive net income per share	0.14		0.10		0.40		0.23
Weighted-average shares of potentially dilutive instruments that are not included in the dilutive share calculation due to anti-dilutive effect:
Compensation plan-related stock options	19,600		33,600		30,429		32,954
Common stock warrant	513,113		513,113		513,113		513,113

Note 14:  Derivative Financial Instruments

In November 2010 the Company entered into an interest rate swap designed to hedge the interest cash flows of its junior subordinated debentures. The swap became effective on March 15, 2011, which is the date on which the junior subordinated debentures switched from a fixed interest rate to a floating interest rate. The maturity date of the swap is March 15, 2018. The Company expects the hedge to be highly effective and it is being accounted for as a cash flow hedge. The unrealized gains and losses of the interest rate swap are being recorded in accumulated other comprehensive income until the interest payment due dates when the balance remaining in other comprehensive income will be removed and charged or credited to interest expense. The swap is designed to make fixed rate payments at 3.795% to the counterparty and receive floating rate payments at three month LIBOR plus 1.33% from the counterparty. Government sponsored entity securities with a fair value of $1.520 million and cash of $1.873 million were pledged as collateral on the swap at September 30, 2012. Government sponsored entity securities with a fair value of $1.505 million and cash of $1.861 million were pledged as collateral on the swap at December 31, 2011.

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

46

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 14:  (Continued)

The following tables summarize the Company’s derivative positions:

	As of September 30, 2012
	Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Balance Sheet Classification	Notional Amount		Fair Value		Balance Sheet Classification	Notional Amount		Fair Value
Derivatives designated in cash flow hedging relationships:
Interest rate swap	Other assets	$	—	$	—	Other liabilities	$	30,000	$	2,653
Derivatives not designated as hedging instruments:
Forward sale agreements	Other assets	18,184		106		Other liabilities	46,010		410
Written interest rate options (locks)	Other assets	30,792		756		Other liabilities	9,896		91
Total derivatives		$	48,976	$	862		$	85,906	$	3,154

	As of December 31, 2011
	Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Balance Sheet Classification	Notional Amount		Fair Value		Balance Sheet Classification	Notional Amount		Fair Value
Derivatives designated in cash flow hedging relationships:
Interest rate swap	Other assets	$	—	$	—	Other liabilities	$	30,000	$	1,834
Derivatives not designated as hedging instruments:
Forward sale agreements	Other assets	22,220		135		Other liabilities	15,287		124
Written interest rate options (locks)	Other assets	4,225		134		Other liabilities	7,021		167
Total derivatives		$	26,445	$	269		$	52,308	$	2,125

Amounts included in the consolidated statements of operations and in other comprehensive income (OCI) in for the three and nine month periods ending on September 30 of 2012 and 2011 are summarized in the following tables:

	Three Months Ended September 30, 2012
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(457	)	Interest on junior subordinated debt	$	(153	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	(341	)
Written interest rate options (locks)	Mortgage banking income				667
Total					$	326

47

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 14:  (Continued)

	Nine Months Ended September 30, 2012
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(1,269	)	Interest on junior subordinated debt	$	(450	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	(392	)
Written interest rate options (locks)	Mortgage banking income				863
Total					$	471

	Three Months Ended September 30, 2011
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(2,001	)	Interest on junior subordinated debt	$	(169	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	(28	)
Written interest rate options (locks)	Mortgage banking income				118
Total					$	90

	Nine Months Ended September 30, 2011
(Dollars in thousands)	Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)			Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)	Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
Interest rate swap	$	(2,908	)	Interest on junior subordinated debt	$	(362	)
	Classification of gain (loss) recognized in earnings				Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
Forward sale agreements	Mortgage banking income				$	137
Written interest rate options (locks)	Mortgage banking income				94
Total					$	231

A net settlement payment of $156 thousand was made to the swap counterparty on September 17, 2012. A total of $455 thousand in settlement payments were made to the swap counterparty during the first nine months of 2012. The Company estimates that approximately $159 thousand will be recognized as a charge to interest expense during the remainder of 2012 related to the swap. The Company expects approximately $632 thousand related to future swap settlements to be recognized as a charge to interest expense over the next twelve months.

48

FIRST M & F CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 15:  Variable Interest Entities

In February 2006, the Company issued $30.928 million in fixed/floating rate junior subordinated deferrable interest debentures to First M&F Statutory Trust I. The Company received $30.000 million in cash and $928 thousand of common securities from the Trust. The debentures mature in March 2036, and interest is payable quarterly. The subordinated debentures are redeemable at par. The subordinated debentures are the only asset of the Trust. The Trust issued $30.000 million in capital securities through a placement and issued $928 thousand of common securities to the Company.

First M&F Statutory Trust I, which is a wholly owned financing subsidiary of the Company for regulatory and legal purposes, is a variable interest entity. A determination has been made that the Company, since its equity interest is not at risk, is not the primary beneficiary and therefore, the Trust is not consolidated with the Company’s financial statements.

The Company is involved as a limited partner in two low income housing tax credit entities. The Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the entity – primarily construction, renovation and property management – that most significantly impact the entity’s economic performance. The Company had a total investment and a total exposure of $2.281 million in these entities at September 30, 2012 and $2.497 million at December 31, 2011. The low income housing tax credit partnership investments are evaluated for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.

49

FIRST M & F CORPORATION

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

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

Forward Looking Statements

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

• A significant weakening of the economy.

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

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

• An unanticipated inflationary spike or deflationary decline.

• A market crash or a highly volatile market.

• A loss of market liquidity for financial products.

• Unfavorable judgments in ongoing litigation.

• Technological disruptions or breaches.

• Unanticipated catastrophic events or natural disasters.

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

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

Financial Summary

Net income for the third quarter of 2012 was $1.794 million, or $0.14 basic and diluted earnings per share as compared to net income of $1.330 million, or $0.10 basic and diluted earnings per share for the same period in 2011 and net income of $1.753 million or $0.14 basic and diluted earnings per share for the second quarter of 2012. Net income for the first nine months of 2012 was $5.154 million or $0.40 basic and diluted earnings per share as compared to net income of $3.386 million or $0.23 basic and diluted earnings per share for the same period in 2011. The major factors contributing to the improvement in earnings for the third quarter of 2012 as compared to the third quarter of 2011 were (1) an increase of $833 thousand in mortgage revenues, (2) a $600 thousand decrease in the loan loss provisions and (3) a small decrease in noninterest expenses highlighted by a decrease of $557 thousand in salaries and employee benefits, a $307 thousand decrease in foreclosure expenses and a $212 thousand decrease in FDIC insurance. The major factors contributing to the improvement in earnings for the third quarter of 2012 as compared to the second quarter of 2012 were (1) a $300 thousand decrease in provision for loan loss expense and (2) a decrease of $220 thousand in FDIC insurance expense offset by (3) a $449 thousand decrease in mortgage revenues.

Highlights for the first nine months of 2012 and 2011 are as follows:

• Debit card revenues increased by 11.11% for the third quarter of 2012 from the third quarter of 2011

• The net interest margin increased to 3.73% in the third quarter of 2012 from 3.72% in the third quarter of 2011

• Loans held for investment were down by $27.639 million from the September 30, 2011 balance

• Nonaccrual loans were 0.62% of total loans at September 30, 2012 as compared to 2.59% at September 30, 2011

• Annualized net charge-offs were 0.26% for the third quarter of 2012 as compared to 2.03% for the third quarter of 2011

• The lease was transferred and fixed assets sold of the Niceville, Florida branch to another financial institution in May 2012

• As a result of branch closings and other cost-saving initiatives, full-time equivalent employees dropped from 496 employees at September 30, 2011 to 466 employees at September 30, 2012

50

FIRST M & F CORPORATION

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

(Net change, in thousands)

	Loans			Non-Interest Bearing Deposits			Interest Bearing Deposits
3rd Qtr 2011	$	(29,629	)	$	(21,584	)	$	(19,056	)
4th Qtr 2011	(18,626		)	9,676			(22,072		)
1st Qtr 2012	(16,845		)	6,885			32,160
2nd Qtr 2012	3,101			(2,458		)	(46,712		)
3rd Qtr 2012	4,731			(2,461		)	(9,403		)

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

(Net amount, in thousands)

	Net Interest Income		Loan Loss Accruals		Non-Interest Income		Non-Interest Expense
3rd Qtr 2011	$	13,225	$	2,580	$	5,219	$	14,143
4th Qtr 2011	12,643		2,280		5,912		15,077
1st Qtr 2012	12,964		2,280		5,421		13,986
2nd Qtr 2012	12,916		2,280		6,035		14,319
3rd Qtr 2012	12,872		1,980		5,607		14,060

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

	3rd Qtr 2012		2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011
Net interest income	$	1.40	$	1.41	$	1.42	$	1.38	$	1.45
Loan loss expense	0.21		0.25		0.25		0.25		0.28
Noninterest income	0.61		0.66		0.59		0.65		0.57
Noninterest expense	1.53		1.56		1.53		1.65		1.55
Net income before taxes	$	0.27	$	0.26	$	0.23	$	0.13	$	0.19

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FIRST M & F CORPORATION

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

	3rd Qtr 2012		2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011
Net interest margin	3.73	%	3.72	%	3.67	%	3.64	%	3.72	%
Efficiency ratio	75.21	%	74.70	%	75.18	%	80.29	%	75.76	%
Return on assets	0.46	%	0.45	%	0.40	%	0.25	%	0.33	%
Return on  total equity	6.18	%	6.27	%	5.84	%	3.54	%	4.78	%
Return on common equity	5.38	%	5.46	%	4.95	%	2.27	%	3.76	%
Noninterest income to avg. assets	1.44	%	1.54	%	1.36	%	1.50	%	1.30	%
Noninterest income to revenues (1)	29.99	%	31.48	%	29.14	%	31.48	%	27.96	%
Noninterest expense to avg assets	3.62	%	3.65	%	3.50	%	3.82	%	3.52	%
Salaries and benefits to total noninterest expense	49.07	%	47.05	%	49.07	%	45.76	%	52.72	%
Nonaccrual loans to loans	0.62	%	0.64	%	1.45	%	1.68	%	2.59	%
90 day past due loans to loans	0.04	%	0.15	%	0.02	%	0.06	%	0.02	%
Annualized net charge offs as a percent of average loans	0.26	%	1.26	%	0.47	%	1.37	%	2.03	%

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

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

(Dollars in thousands)	3rd Qtr 2012		2nd Qtr 2012		1st Qtr 2012		4th Qtr 2011		3rd Qtr 2011
Mortgage originations	$	47,295	$	38,693	$	30,508	$	41,297	$	25,863
Trust revenues	43		46		41		43		56
Retail investment revenues	70		117		99		110		90
Revenues per FTE employee	40		41		40		39		37
Agency commissions per agency FTE employee (1)	27		22		22		20		26

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

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

	3rd Qtr 2012	2nd Qtr 2012	1st Qtr 2012	4th Qtr 2011	3rd Qtr 2011
Full-time equivalent employees	466	468	460	460	496
Number of noninterest-bearing deposit accounts	31,962	31,980	32,081	32,332	32,587

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FIRST M & F CORPORATION

Net Interest Income

Net interest income before loan loss expenses for the first nine months of 2012 was $38.752 million as compared to $39.221 million for the first nine months of 2011. For the first nine months of 2012 compared to 2011: earning asset yields decreased by 36 basis points, liability costs decreased by 41 basis points, the net interest spread increased by 5 basis points and the net interest margin increased by 1 basis point.

Net interest income before loan loss expenses for the third quarter of 2012 was $12.872 million as compared to $13.225 million for the third quarter of 2011 and $12.916 million for the second quarter of 2012. For the third quarter of 2012 compared to the same quarter of 2011: earning asset yields decreased by 32 basis points, liability costs decreased by 35 basis points, the net interest spread increased by 3 basis points and the net interest margin increased by 1 basis point. For the third quarter of 2012 compared to the second quarter of 2012: earning asset yields decreased by 6 basis points, liability costs decreased by 6 basis points, the net interest spread increased by 1 basis point and the net interest margin increased by 1 basis point.

Balance sheet dynamics affecting the comparative net interest margins for the first nine months of 2012 compared to 2011 include (1) a decrease of 6.17% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 72.23% in the first nine months of 2011 to 69.02% in the first nine months of 2012, (3) a decrease in average interest-bearing deposits of 2.84%, (4) a decrease in average other borrowings of 7.71% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 13.49% in 2011 to 14.62% in 2012.

Balance sheet dynamics affecting the comparative net interest margins for the third quarter of 2012 compared to 2011 include (1) a decrease of 4.29% in average loans held for investment, (2) a decrease in average loans held for investment as a percentage of earning assets from 71.75% in the third quarter of 2011 to 70.47% in the third quarter of 2012, (3) a decrease in average interest-bearing deposits of 4.86%, (4) a decrease in average other borrowings of 6.89% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 14.05% in 2011 to 15.07% in 2012.

Balance sheet dynamics affecting the comparative net interest margins for the third quarter of 2012 compared to the second quarter of 2012 include (1) an increase of 1.10% in average loans held for investment, (2) an increase in average loans held for investment as a percentage of earning assets from 68.54% in the second quarter of 2012 to 70.47% in the third quarter of 2012, (3) a decrease in average interest-bearing deposits of 3.18%, (4) a decrease in average other borrowings of 1.87% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 14.75% in the second quarter of 2012 to 15.07% in the third quarter of 2012.

Yield and cost dynamics affecting the comparative net interest margins for the first nine months of 2012 compared to 2011 include (1) a decrease of 24 basis points in yields on loans held for investment and for sale, (2) a decrease of 43 basis points in investment and short-term funds yields, (3) a decrease of 41 basis points in costs of deposits and (4) an increase of 7 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for the third quarter of 2012 compared to 2011 include (1) a decrease of 33 basis points in yields on loans held for investment and for sale, (2) a decrease of 30 basis points in investment and short-term funds yields, (3) a decrease of 37 basis points in costs of deposits and (4) an increase of 5 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for the third quarter of 2012 compared to the second quarter of 2012 include (1) a decrease of 13 basis points in yields on loans held for investment and for sale, (2) a decrease of 4 basis point in investment and short-term funds yields, (3) a decrease of 5 basis points in costs of deposits and (4) a decrease of 24 basis points in costs of borrowings.

Net interest income for the third quarter of 2012 was down minimally as compared to the second quarter of 2012 as earning asset yields and liability costs both decreased by 6 basis points and the net interest margin increased by 1 basis point, but average earning assets decreased by $23.546 million. A positive trend occurred with an increase in average loans held for investment of $10.737 million over the second quarter and an increase in the balances outstanding of loans held for investment of $4.731 million as compared to the end of June. Average loans held for investment as a percent of average earning assets increased from 68.54% for the second quarter to 70.47% for the third quarter.

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FIRST M & F CORPORATION

Net interest income for the third quarter for 2012 as compared to the third quarter of 2011 decreased due primarily to trends that were prevalent throughout 2011. Earning assets decreased by $36.365 million from the third quarter of 2011 to the third quarter of 2012 while the net interest margin increased from 3.72% to 3.73%. Earning asset yields decreased by fewer basis points than liability costs as the earning asset mix shifted with short-term interest-bearing funds decreasing and the investment portfolio increasing. Certificates of deposit declined as a percent of interest-bearing liabilities from 39.25% for the third quarter of 2011 to 33.87% for the third quarter of 2012 as funds continued to move to lower costing, more liquid deposit types.

Net interest income for the first nine months of 2012 as compared to the first nine months of 2011 decreased due to a decline in average earning assets as the net interest margin increased from 3.69% to 3.70%. Average earning assets declined by $26.103 million while interest-bearing liabilities declined by $48.191 million - producing more financial leverage from noninterest-bearing demand deposits. Earning asset yields declined by 36 basis points from the first nine months of 2011 to the first nine months of 2012 while liability costs declined by 41 basis points. The change in the net interest margin tracked the change in the average 3-month Treasury rate, which increased by 2 basis points. The yield curve continued to flatten as the spread between 10-year and 2-year Treasury rates declined from 267 basis points in December 2010 to 177 basis points in September 2011 and to 146 basis points in September 2012. The Federal Reserve's monetary policy actions over the last 12 months have resulted in increased short-term rates and decreased long-term rates. This will eventually result in a slow down in the declining trend of deposit costs and an acceleration in the decline in loan yields. This implies that loan volume growth will be of growing importance in the management of net interest income going forward. The strength of the economy, especially with respect to how it affects consumer spending and the ability of small businesses to grow, will be the primary driver of loan growth over the next year.

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FIRST M & F CORPORATION

The following table shows the components of the net interest margin for the second and third quarters of 2012 and 2011:

	Yields/Costs				Yields/Costs
	3rd Quarter, 2012		2nd Quarter, 2012		3rd Quarter, 2011		2nd Quarter, 2011
Interest bearing bank balances	0.29	%	0.37	%	0.23	%	0.26	%
Federal funds sold	0.31		0.27		0.25		0.25
Taxable investments	1.75		1.88		2.61		2.95
Tax-exempt investments	5.44		5.59		6.04		5.98
Loans held for sale	2.83		3.22		3.27		3.75
Loans held for investment	5.54		5.69		5.82		5.85
Earning asset yield	4.51		4.57		4.83		5.00
Interest checking	0.38		0.43		0.51		0.71
Money market deposits	0.27		0.37		0.65		0.77
Savings deposits	0.96		0.95		1.09		1.12
Certificates of deposit	1.23		1.31		1.72		1.76
Short-term borrowings	0.49		0.62		0.48		0.34
Other borrowings	4.04		4.21		4.05		4.15
Cost of interest-bearing liabilities	0.92		0.98		1.27		1.37
Net interest spread	3.59		3.59		3.56		3.63
Effect of non-interest bearing deposits	0.15		0.16		0.19		0.2
Effect of leverage	(0.01	)	(0.03	)	(0.03	)	(0.08	)
Net interest margin, tax-equivalent	3.73		3.72		3.72		3.75
Less: Tax equivalent adjustments:
Investments	0.05		0.05		0.05		0.05
Loans	0.01		0.01		0.01		0.02
Reported book net interest margin	3.67	%	3.66	%	3.66	%	3.68	%
The following table shows the components of the net interest margin for the first nine months of 2012 and 2011:
	Yields/Costs
	YTD September 2012		YTD September 2011
Interest bearing bank balances	0.29	%	0.24	%
Federal funds sold	0.26		0.25
Taxable investments	1.87		2.81
Tax-exempt investments	5.61		6.00
Loans held for sale	3.06		3.55
Loans held for investment	5.68		5.86
Earning asset yield	4.55		4.91
Interest checking	0.43		0.68
Money market deposits	0.39		0.75
Savings	0.97		1.14
Certificates of deposit	1.31		1.78
Short-term borrowings	0.52		0.31
Other borrowings	4.08		4.39
Cost of interest-bearing liabilities	0.98		1.39
Net interest spread	3.57		3.52
Effect of non-interest bearing deposits	0.16		0.20
Effect of leverage	(0.03	)	(0.03	)
Net interest margin, tax-equivalent	3.70		3.69
Less: Tax equivalent adjustments:
Investments	0.05		0.05
Loans	0.01		0.02
Reported book net interest margin	3.64	%	3.62	%

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FIRST M & F CORPORATION

The following table shows average balance sheets for the second and third quarters of 2012 and 2011:

(Dollars in thousands)
	3rd Quarter,			2nd Quarter,			3rd Quarter,			2nd Quarter,
	2012			2012			2011			2011
Interest bearing bank balances	$	28,177		$	30,923		$	74,683		$	71,291
Federal funds sold	660			15,082			25,000			25,000
Taxable investments	323,015			333,794			265,438			262,915
Tax-exempt investments	37,945			36,610			33,294			32,407
Loans held for sale	22,745			30,416			6,402			2,928
Loans held for investment	984,282			973,545			1,028,372			1,050,136
Earning assets	1,396,824			1,420,370			1,433,189			1,444,677
Other assets	149,592			157,050			158,841			154,194
Total assets	$	1,546,416		$	1,577,420		$	1,592,030		$	1,598,871
Interest checking	$	384,075		$	404,958		$	383,104		$	400,942
Money market deposits	207,344			217,533			175,471			167,657
Savings deposits	117,534			121,778			118,273			117,783
Certificates of deposit	401,500			402,703			490,297			493,722
Short-term borrowings	4,594			2,974			6,319			8,637
Other borrowings	70,430			71,771			75,641			77,440
Interest-bearing liabilities	1,185,477			1,221,717			1,249,105			1,266,181
Noninterest-bearing deposits	233,107			232,744			223,689			216,227
Other liabilities	12,288			10,493			8,824			7,552
Stockholders’ equity	115,544			112,466			110,412			108,911
Liabilities and stockholders’ equity	$	1,546,416		$	1,577,420		$	1,592,030		$	1,598,871
Loans to earning assets	70.47		%	68.54		%	71.75		%	72.69		%
Loans to assets	63.65		%	61.72		%	64.60		%	65.68		%
Earning assets to assets	90.33		%	90.04		%	90.02		%	90.36		%
Noninterest-bearing deposits to assets	15.07		%	14.75		%	14.05		%	13.52		%
Equity to assets	7.47		%	7.13		%	6.94		%	6.81		%

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FIRST M & F CORPORATION

The following table shows average balance sheets for the first nine months of 2012 and 2011:

(Dollars in thousands)
	YTD September 2012			YTD September 2011
Interest bearing bank balances	$	46,038		$	79,876
Federal funds sold	13,534			25,000
Taxable investments	318,825			259,198
Tax-exempt investments	36,513			33,211
Loans held for sale	25,288			4,539
Loans held for investment	980,556			1,045,033
Earning assets	1,420,754			1,446,857
Other assets	156,084			157,453
Total assets	$	1,576,838		$	1,604,310
Interest checking	$	402,695		$	395,544
Money market deposits	217,124			168,287
Savings deposits	120,040			117,299
Certificates of deposit	407,076			499,313
Short-term borrowings	4,209			12,893
Other borrowings	71,765			77,764
Interest-bearing liabilities	1,222,909			1,271,100
Noninterest-bearing deposits	230,496			216,475
Other liabilities	10,505			7,740
Stockholders’ equity	112,928			108,995
Liabilities and stockholders’ equity	$	1,576,838		$	1,604,310
Loans to earning assets	69.02		%	72.23		%
Loans to assets	62.18		%	65.14		%
Earning assets to assets	90.10		%	90.19		%
Noninterest-bearing deposits to assets	14.62		%	13.49		%
Equity to assets	7.16		%	6.79		%

Provision for Loan Losses

The accrual for the provision for loan losses for the third quarter of 2012 was $1.980 million as compared to $2.280 million for the second quarter of 2012 and $2.580 million for the third quarter of 2011. Net charge-offs were $634 thousand for the third quarter of 2012 as compared to $3.054 million for the second quarter of 2012 and $5.274 million for the third quarter of 2011. The accrual for the provision for loan losses for the first nine months of 2012 was $6.540 million as compared to $7.440 for the same period in 2011. Net charge-offs were $4.837 million for the first nine months of 2012 as compared to $7.354 for the same period in 2011. The allowance for loan losses as a percentage of loans was 1.69% at September 30, 2012, 1.50% at December 31, 2011, and 1.59% at September 30, 2011.

The provisions for loan loss accruals have decreased from 2011 to 2012 as net charge-offs have declined, substandard loans have declined and the loan portfolio has decreased. Nonaccrual loans at September 30, 2012 were at their lowest balance since the second quarter of 2007.

The Credit Risk Management section of this discussion provides further details on the allowance provisioning process.

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Non Interest Income

Noninterest income, excluding securities transactions, was $5.659 million for the third quarter of 2012 as compared to $4.959 million for the same period in 2011 and $6.038 million in the second quarter of 2012. For the third quarter of 2012 as compared to the third quarter of 2011: (1) deposit revenues decreased by $132 thousand, (2) mortgage banking revenues increased by $833 thousand and (3) agency commissions decreased by $9 thousand. For the third quarter of 2012 as compared to the second quarter of 2012: (1) deposit revenues increased by $41 thousand, (2) mortgage banking revenues decreased by $449 thousand and (3) agency commissions increased by $153 thousand.

The third quarter of 2012 showed a decrease of 4.85% from the third quarter of 2011 and a 1.61%increase from the second quarter of 2012 in deposit revenues. Overdraft fee revenues, which comprise approximately 54% of deposit revenues, decreased by 12.79% from the third quarter of 2011 to the third quarter of 2012 and increased by 6.76% from the second quarter of 2012 to the third quarter of 2012. On August 1, 2011 the Company increased the per item charge for overdrafts by $6 per item. The year-over-year positive impact of the fee increase was fully offset by a 17.60% decline in overdraft items processed. Overdraft fee revenues increased by $89 thousand from the second quarter of 2012 to the third quarter of 2012, primarily due to increased volumes. Overdraft fees are per item charges applied to each check paid on an overdrawn account or returned. The per item fee is determined by the Company’s pricing committee and is based primarily on the competitive market prices as well as on costs associated with processing the items.

The majority of the volumes of overdraft items processed come from customers in the Company’s overdraft protection program which grants overdraft limits to customers, generally allows account activity up to the overdraft limit balance, and requires that accounts have positive balances at some point within a thirty day period. Overdrafts are considered loans for accounting purposes and therefore are subject to the Company’s loan accounting policies concerning the charging off of accounts to the allowance for loan losses. Interest charged on overdrawn balances, based on the Federal discount rate, is recorded as interest on loans. The overdraft protection program is designed to help customers with their cash flow needs and is not extended to individuals who are poor credit risks.

Debit card revenues increased by 11.11% from the third quarter of 2011 to the third quarter of 2012 and decreased by 5.06% from the second quarter of 2012 to the third quarter of 2012 as monthly transaction volumes have increased steadily since February 2012. The third quarter of 2012 saw a pull-back in transaction volume as compared to the second quarter, but still continued on a pace exceeding the volumes in 2011. The Dodd-Frank Act includes measures that allow the Federal Reserve to define limits on large banks for interchange fees that may be charged on debit cards. The Federal Reserve issued a final rule on June 29, 2011, setting the fee cap at $.21 per transaction plus 5 basis points multiplied by the value of the transaction, with an additional potential fee of $.01 per transaction as a fraud-prevention reimbursement. The fee caps only apply to banks with $10 billion or more in total assets. The final rule went into effect on October 1, 2011. The Company has not experienced any direct or indirect negative consequences from the implementation of the fee caps. The following table shows the components of deposit account income:

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30				September 30
	2012		2011		2012		2011
Service charge revenues	$	284	$	300	$	854	$	902
Debit/ATM card revenues	900		810		2,695		2,450
Overdraft fee revenues	1,405		1,611		4,045		4,300
Service charges on deposit accounts	$	2,589	$	2,721	$	7,594	$	7,652

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FIRST M & F CORPORATION

Mortgage banking income increased by 158.97% from the third quarter of 2011 to the third quarter of 2012 and decreased by 24.86% from the second quarter of 2012 to the third quarter of 2012. Mortgage originations increased by 82.87% from the third quarter of 2011 to the third quarter of 2012 and increased by 22.23% from the second quarter of 2012 to the third quarter of 2012.

The following table summarizes certain performance metrics related to mortgage revenues:

(Dollars in thousands)										YTD			YTD
	3Q12			2Q12			3Q11			September 2012			September 2011
Non-interest income:
Retail revenues	$	612		$	1,110		$	550		$	2,002		$	1,229
Selected non-interest expenses: (a)
Recourse expenses	25			74			—			105			—
Closing and shipping expenses	264			182			127			589			323
Origination-related expenses	289			256			127			694			323
Adjusted revenues	$	323		$	854		$	423		$	1,308		$	906
Retail originations	$	28,586		$	23,898		$	22,126		$	69,918		$	46,872
Retail sales	$	27,945		$	25,123		$	15,406		$	69,163		$	44,101
Adjusted revenues / dollar sales	1.16		%	3.40		%	2.75		%	1.89		%	2.05		%
Non-interest income:
Wholesale revenues	$	745		$	696		$	(26	)	$	1,728		$	(26	)
Selected non-interest expenses: (a)
Broker fees	363			368			6			934			6
Recourse expenses	23			86			—			109			—
Closing and shipping expenses	105			132			81			307			81
Origination-related expenses	491			586			87			1,350			87
Adjusted revenues	$	254		$	110		$	(113	)	$	378		$	(113	)
Wholesale originations	$	18,709		$	14,795		$	3,737		$	46,578		$	3,737
Wholesale sales	$	15,588		$	18,055		$	855		$	43,248		$	855
Adjusted revenues / dollar sales	1.63		%	0.61		%	(13.22		)%	0.87		%	(13.22		)%

(a) Selected noninterest expenses are those expenses related to mortgage closings, credit risk, and broker fees and discounts. They do not include originator, processor, or underwriter compensation costs.

Conventional 30-year mortgage rates fell steadily by 91 basis points throughout 2011, ending the year at 3.95%. Rates were volatile during the first quarter of 2012 but ended relatively flat as compared to the beginning of the year. Mortgage rates steadily declined during the second and third quarters of 2012, ending the third quarter 68 basis points lower than their high point in late March. The 30-year mortgage rate ended the third quarter at 3.40% after beginning the year at 3.95%. The rate decline triggered the increases in origination volumes for the first nine months of 2012. Management expects mortgage origination volumes to remain steady until the economy strengthens to the point that long-term rates are allowed to move up.

Agency commission income decreased by .89% from the third quarter of 2011 to the third quarter of 2012 and increased by 18.04% from the second quarter of 2012 to the third quarter of 2012. Property and casualty commissions decreased by $11 thousand while life and health commissions increased by $2 thousand and annuity commissions remained unchanged for the third quarter of 2012 as compared to the third quarter of 2011. Property and casualty commissions increased by $129 thousand while life and health commissions increased by $24 thousand for the third quarter of 2012 as compared to the second quarter of 2012. Insurance commission volumes are expected to be influenced by the strength of the economy, competitive pricing pressures and sales efforts.

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FIRST M & F CORPORATION

The Company had sales and calls of $6.527 million of U.S. government-sponsored entity (GSE) securities for a net loss of $27 thousand during the third quarter of 2012. The Company also had sales and calls of $50 thousand of municipal securities for no gain or loss during the third quarter of 2012. The Company had sales and calls of $30.374 million of GSE securities for a net loss of $41 thousand during the first nine months of 2012. The Company also had sales and calls of $17.115 million of mortgage-backed securities for net gains of $595 thousand during the first nine months of 2012. The Company also had sales and calls of $1.334 million of municipal securities for net gains of $11 thousand during the first nine months of 2012. Most of the investment gains for 2012 were generated during the first quarter through sales of mortgage-backed securities and GSE securities. The gains were used to offset losses that were being taken on foreclosed properties. The Company had sales of $58.911 million of mortgage-backed and GSE securities for a net gain of $2.191 million during the first nine months of 2011. The Company also had $28.720 million of investment securities called for a net loss of $41 thousand during the first nine months of 2011. Sales of GSE and mortgage-backed securities during 2011 were generated to support earnings and preserve capital.

The Company owns five separate beneficial interests in collateralized debt obligations that own bank trust preferred securities. These beneficial interests are tested for impairment on a quarterly basis. All of the beneficial interests have incurred other-than-temporary impairments since 2008. Three of the beneficial interests - Trapeza I, Trapeza II and Trapeza V - are deferring their interest payments and are in nonaccrual status. The Trapeza V, Tpref Funding II and MM Community Funding IX beneficial interests failed impairment tests during the first nine months of 2011. The Tpref Funding II beneficial interest failed impairment tests during the second and third quarters of 2012. The total amount of interest that would have been earned by the securities that were in nonaccrual status during the first nine months of 2012 was $56 thousand and for the first nine months of 2011 was $59 thousand.

The Company’s holdings are at risk if enough of the trust preferred securities default so that the beneficial interests senior to and equal to the Company’s owned beneficial interests cannot be fully paid. Impairment tests of these beneficial interests are performed each quarter to determine if losses are expected due to cash flow deficiencies. This is primarily done by projecting cash flows to be received on the Company’s interests owned after determining the effect of expected collateral defaults on the payments made by the interests senior to and equal to the Company’s interests owned. If the cash flows expected to be received by the Company are less than the original contractual cash flows, then an other-than-temporary credit-related impairment, which is charged against current earnings, is assumed. The remaining difference between the fair value of the beneficial interest and its book value is charged against other comprehensive income.

The following table shows the other-than-temporary charges that the Company incurred during 2012.

(Dollars in thousands)	Other-Than-Temporary Impairment Charged Against Earnings						Other-Than-Temporary Impairment Charged To (Reclassified From) Other Comprehensive Income
Name of Issuer	1st Quarter		2nd Quarter		3rd Quarter		1st Quarter		2nd Quarter		3rd Quarter
Tpref Funding II	$	—	$	4	$	25	$	—	$	4	$	(25	)
Total	$	—	$	4	$	25	$	—	$	4	$	(25	)

The following table shows the other-than-temporary charges that the Company incurred during 2011.

(Dollars in thousands)	Other-Than-Temporary Impairment Charged Against Earnings						Other-Than-Temporary Impairment Charged To (Reclassified From) Other Comprehensive Income
Name of Issuer	1st Quarter		2nd Quarter		3rd Quarter		1st Quarter			2nd Quarter				3rd Quarter
Tpref Funding II	$	69	$	—	$	5	$	(73	)	$	—			$	1
Trapeza V 2003-5A	224		—		—		36			—			—	—
MM Community Funding IX	3		85		195		(19		)	(87		)		(72		)
Total	$	296	$	85	$	200	$	(56	)	$	(87	)		$	(71	)

60

FIRST M & F CORPORATION

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

As of September 30, 2012
(Dollars in thousands)
Name of Issuer	Class	Book Value		Fair Value		Unrealized Loss		Moody's Credit Rating	Number of Banks in Issuance	Deferrals and Defaults as a Percent of Collateral		Excess Subordination
Trapeza I 2002-1A	C1	$	474	$	98	$	376	C	22	39.51	%	—	%
Trapeza II 2003-2A	C1	988		263		725		Ca	36	34.70	%	—	%
Tpref Funding II	B	686		211		475		Caa3	34	38.81		—	%
Trapeza V 2003-5A	C1	608		142		466		Ca	42	33.97	%	—	%
MM Community Funding IX	B1	352		141		211		Caa3	31	42.27	%	—	%
		$	3,108	$	855	$	2,253

The excess subordination percent is an indication of the ability of the collateral, net of expected defaults and deferrals, to cover the payment of the beneficial interests that the Company owns after all senior beneficial interests have been paid off. A positive percent indicates the excess percent of funds available over what is required to pay off the beneficial interests that the Company owns. A percent of zero indicates that the amount of funds available is less than the balance of the beneficial interests that the Company owns.

Significant components of other income for the second and third quarters of 2012 and 2011 are contained in the following table:

(Dollars in thousands)	3Q2012		2Q2012		3Q2011		2Q2011
Agency profit-sharing revenues	$	—	$	10	$	—	$	3
Loan fees	106		76		93		100
Gains on disposals of branch properties	—		44		—		—
All other income	338		361		302		293
Total other income	$	444	$	491	$	395	$	396

Agency profit-sharing revenues are profit sharing distributions received by M&F Insurance Group, Inc. from its underwriting companies generally based on the amount of business written during the previous year adjusted for claims incurred. Loan fees include fees other than origination fees, primarily monthly collateral monitoring fees related to asset-based lending arrangements and fees charged for issuing letters of credit. Other income for the second quarter of 2012 includes $44 thousand in net gains on the sale of the Niceville, Florida branch property to another financial institution.

The Company has a strategy to increase noninterest revenues as a proportion of total revenues over time. Noninterest revenues as a percentage of total revenues increased from 27.96% in the third quarter of 2011 to 29.99% in the third quarter of 2012, and decreased from 31.48% in the second quarter of 2012 to 29.99% in the third quarter of 2012. Another metric that the Company monitors is revenues per full-time employee, which were approximately $40 thousand per employee for the third quarter of 2012, $41 thousand for the second quarter of 2012, $37 thousand for the third quarter of 2011 and $37 thousand for the second quarter of 2011. Insurance product revenues per producer increased to $27 thousand per producer for the third quarter of 2012 from $26 thousand per producer for the third quarter of 2011. Management’s strategic focus is to improve revenues generated per employee while maintaining stability in revenue growth by increasing the mix of noninterest revenues to total revenues.

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FIRST M & F CORPORATION

Non Interest Expense

Noninterest expenses decreased by .59% from the third quarter of 2011 to the third quarter of 2012 and decreased by 1.80% from the second quarter of 2012 to the third quarter of 2012.

Salary and benefit expenses, which comprise approximately 49% of noninterest expenses, decreased by 7.47% from the third quarter of 2011 to the third quarter of 2012 and increased by 2.41% from the second quarter of 2012 to the third quarter of 2012. The number of full-time equivalent employees was 466 at September 30, 2012, 468 at December 31, 2011, 496 at September 30, 2011, and 510 at December 31, 2010. The decrease in salary and benefit expenses from the first nine months of 2011 to the first nine months of 2012 was due primarily to restructuring efforts initiated during the third quarter of 2011. The restructuring project called for the closure of five branches, the sale of up to two branches and a reduction in staffing of approximately 55 positions. Four branches were closed in Mississippi and one was closed in Alabama although no markets were exited. A sale of the Niceville, Florida branch location closed during the second quarter of 2012. Substantially all of the staffing reductions occurred during the third and fourth quarters of 2011 with severance costs of $238 thousand being incurred. For the third quarter of 2012 compared to the second quarter of 2012, salaries and commissions were up by $143 thousand due primarily to corporate-wide raises granted in April and an increase in part-time staffing during the summer months.

During April 2012, restricted stock grants totaling 298,746 shares were issued to employees and grants totaling 81,900 shares were issued to directors. The grants have five-year cliff vesting lives. The employee grants are being recognized over their vesting periods in salary and benefits expenses. The director grants are being recognized over their vesting periods in other expenses.

Foreclosed property expenses decreased from the third quarter of 2011 to the third quarter of 2012 due primarily to lower property costs and lower losses taken on sales of properties. The third quarter losses were the result of sales of $3.336 million of foreclose properties as compared to second quarter sales of $4.787 million of properties. Management expects expenses and losses related to foreclosed properties to continue to be a significant expense through 2012 as the Company continues to foreclose on non-performing loans and dispose of the properties in a weak real estate market.

The components of foreclosed property expenses for the second and third quarters of 2012 and 2011 are contained in the following table:

(Dollars in thousands)	3Q2012			2Q2012			3Q2011			2Q2011
Losses on sales of other real estate	$	168		$	495		$	356		$	124
Write-downs of other real estate	645			536			670			1,053
Other real estate expenses	387			288			610			327
Rental income on other real estate properties	(24		)	(37		)	(153		)	(36		)
Total foreclosed property expenses	$	1,176		$	1,282		$	1,483		$	1,468

FDIC insurance assessments decreased by 38.90% from the third quarter of 2011 to the third quarter of 2012 and decreased by 39.78% from the second quarter of 2012 to the third quarter of 2012. The primary causes of the expense decrease for the first nine months of 2012 as compared to 2011 were (1) the effect of the change in assessment base and assessment rate as prescribed by the Dodd-Frank Act and (2) an improvement in the assessment rate category for the Company beginning in the third quarter due to improved performance related to certain regulatory criteria. The FDIC, as required by the Dodd-Frank Act, redefined the deposit assessment insurance base effective April 1, 2011. The new assessment base is generally defined as average consolidated assets minus average tangible equity, subject to adjustments for unsecured debt and brokered deposits. The new base assessment rate applicable to the adjusted asset base is generally 14 basis points annually. Beginning in the third quarter of 2012, the base assessment rate for the Company was adjusted downward by approximately 7 basis points due to its movement into the improved risk category. The previous base assessment rate applicable to the adjusted deposit base in 2011 was generally 22 basis points annually.

Significant components of other expense for the second and third quarters of 2012 and 2011 are contained in the following table:

(Dollars in thousands)	3Q2012		2Q2012		3Q2011		2Q2011
Postage and shipping	$	223	$	224	$	215	$	232
Supplies	182		214		202		182
Legal expenses	252		274		244		250
Other professional expenses	349		324		236		267
Insurance expenses	285		141		274		104
Debit card processing expenses	248		220		194		194
Mortgage processing expenses	781		842		25		94
All other expenses	1,038		1,213		803		1,373
Total other expense	$	3,358	$	3,452	$	2,193	$	2,696

62

FIRST M & F CORPORATION

Income Taxes

The average tax rate for the first nine months of 2012 was 25.41% as compared to 19.11% for the first nine months of 2011. The low average tax rates are due primarily to the low level of net income before taxes as compared to the tax-exempt revenues and tax credit items available for those periods.

At September 30, 2012, the Company had a current tax benefit receivable of $175 thousand and a deferred tax asset of $11.011 million. At December 31, 2011, the Company had a current tax receivable of $175 thousand and a deferred tax asset of $14.115 million. The Company carried forward $11.125 million in Federal net operating losses (NOLs) and $18.328 million of Mississippi NOLs from its 2011 tax returns. Management expects that the remaining net operating losses will be realized through carry-forwards within the next five years. The Company expects to utilize the tax benefits implicit in the deferred tax asset in the foreseeable future when (1) current tax benefits increase as losses are realized through loan charge-offs and collateral foreclosures and dispositions and (2) future earnings become sufficient to absorb the deductions. The following table shows the differences between actual income tax expense and expected income tax expense, listing significant items that affected the average tax rate for each period:

(Dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Amount computed using the Federal statutory rates on income before taxes	$	830		$	585		$	2,350		$	1,423
Increase (decrease) resulting from:
State income tax expense, net of Federal effect	60			36			162			72
Tax exempt income, net of disallowed interest deduction	(119		)	(122		)	(358		)	(367		)
Life insurance income	(52		)	(56		)	(178		)	(178		)
Low income housing tax credits	(83		)	(55		)	(248		)	(165		)
Other, net	9			3			28			15
Total income tax expense	$	645		$	391		$	1,756		$	800

63

FIRST M & F CORPORATION

Assets and Liabilities

Assets decreased by 2.12% from September 30, 2011 to September 30, 2012, and decreased by .99% from December 31, 2011. Investments increased by 15.31% from September 30, 2011 to September 30, 2012, and increased by 10.42% from December 31, 2011.

The following table shows net changes in the major balance sheet categories for the quarter-to-date and year-to-date as of September 30, 2012 and 2011 and year-over-year for September 30, 2012:

	September 30, 2012						September 30, 2011						September 30, 2012
(Dollars in thousands)	Net Change						Net Change						Net Change
	QTD			YTD			QTD			YTD			Year-Over-Year
Cash and due from banks	$	4,458		$	1,629		$	1,399		$	(2,554	)	$	(940	)
Interest-bearing bank balances and Federal funds sold	15,319			(21,614		)	(37,821		)	(6,077		)	(48,249		)
Securities available for sale	(23,482		)	33,414			14,034			30,238			47,021
Loans held for sale	1,257			(2,525		)	9,559			5,434			11,872
Loans held for investment	4,731			(9,013		)	(29,629		)	(45,180		)	(27,639		)
Allowance for loan losses	(1,346		)	(1,703		)	2,694			(86		)	(545		)
Other real estate	(3,075		)	(8,950		)	2,072			1,597			(4,720		)
Other assets	(6,181		)	(6,712		)	1,469			(469		)	(10,490		)
Total assets	$	(8,319	)	$	(15,474	)	$	(36,223	)	$	(17,097	)	$	(33,690	)
Total deposits	(11,864		)	(21,989		)	(40,640		)	8,447			(34,385		)
Total borrowings	652			(3,190		)	2,150			(31,208		)	(8,480		)
Other liabilities	(194		)	2,297			1,540			1,949			2,951
Stockholders’ equity	3,087			7,408			727			3,715			6,224
Total liabilities and equity	$	(8,319	)	$	(15,474	)	$	(36,223	)	$	(17,097	)	$	(33,690	)

Deposits declined during the third quarter of 2012 primarily in certificates of deposit. The deposit declines were funded primarily from investment portfolio cash flows generated from mortgage-backed securities payments and proceeds from called securities. Loans held for investment grew during the third quarter with the largest contributors being residential loans which grew by $7.702 million and asset-based loans which grew by $5.747 million. Other real estate declined during the third quarter of 2012 as $3.335 million of properties were disposed of. The first nine months of 2012 were dominated by asset movement as increased investments were funded by cash flows from loan portfolio net decreases and a decrease in interest-bearing bank balances and Fed funds sold. Approximately $137.873 million of securities were purchased during the first nine months of 2012, 30.64% of which were U.S. government sponsored entity securities and 53.22% of which were mortgage-backed securities. Approximately 73% of the purchases were funded by security sales, calls, maturities and principal payments. The security purchases were prompted by the need to redeploy excess liquidity, so the investment portfolio was used to provide better yields than the short-term cash. Most loan categories declined during the first nine months of 2012 with construction loans, other commercial real estate loans and agricultural loans making up most of the decline from December 31, 2011. At September 30, 2012 real estate-secured loans made up 79.94% of loans held for investment as compared to 81.56% at September 30, 2011.

During the first nine months of 2011 deposit growth was used to pay down borrowing and build liquidity. Most of the cash flow from the pay-down of the loan portfolio was reinvested into securities as loans continued to decline. Asset-based loans were one sector of the portfolio that grew during the first nine months of 2011, increasing by $10.835 million. A commercial products division was started in August of 2011 to acquire loan participations, build the asset-based lending portfolio, grow the commercial and industrial loan portfolio and begin the process of rebuilding the commercial real estate loan portfolio.

Loans as a percent of total assets were 63.57% at September 30, 2012, 63.52% at December 31, 2011, and 63.96% at September 30, 2011. Management projects that the commercial real estate loan portfolio will decline at a slower pace over the next twelve months as foreclosures decrease and lending opportunities begin to emerge. Small business and consumer loan growth will depend on the momentum of economic growth.

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FIRST M & F CORPORATION

The following table shows loans held for investment by type as September 30, 2012, December 31, 2011, and September 30, 2011:

(Dollars in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Commercial real estate	$	554,475	$	574,505	$	603,904
Residential real estate	197,629		186,815		185,564
Home equity lines	37,196		37,024		38,320
Commercial, financial and agricultural	155,890		155,330		143,133
Consumer	42,137		42,666		44,045
Total	$	987,327	$	996,340	$	1,014,966
Mortgages held for sale	$	23,548	$	26,073	$	11,676

Deposits decreased by 2.48% from September 30, 2011 to September 30, 2012, and decreased by 1.60% from December 31, 2011. The following table shows the breakdown by deposit category of core deposit and public funds deposit changes from December 31, 2011 to September 30, 2012:

	Core Customers					Public Funds					Total Deposits
(Dollars in thousands)	Increase (Decrease)					Increase (Decrease)					Increase (Decrease)
	Amt.			Pct.		Amt.			Pct.		Amt.			Pct.
Noninterest-bearing	$	871		0.39	%	$	1,095		15.38	%	$	1,966		0.85	%
NOW	(721		)	(0.32	)%	(3,164		)	(1.91	)%	(3,885		)	(1.00	)%
MMDA	19,758			11.08	%	(987		)	(5.07	)%	18,771			9.49	%
Savings	(2,204		)	(1.85	)%	(85		)	(25.30	)%	(2,289		)	(1.91	)%
Customer CDs	(34,672		)	(8.64	)%	(2,263		)	(15.81	)%	(36,935		)	(8.89	)%
Brokered CDs	1,132			10.50	%	(749		)	(12.95	)%	383			2.31	%
Total	$	(15,836	)	(1.37	)%	$	(6,153	)	(2.89	)%	$	(21,989	)	(1.60	)%

Large fluctuations moved core money market deposits, which increased by $25.688 million during the first quarter, decreased by $8.282 million during the second quarter and stabilized during the third quarter. Approximately 84% of the core customer MMDA growth during the first quarter occurred in one commercial account. Although core certificates of deposit declined during the first nine months of 2012, approximately 67.22% of the decrease occurred during the first quarter, with the second quarter remaining relatively stable and the third quarter showing a decline of $8.720 million. The decrease in certificates of deposit resulted primarily from the low interest rate environment as other products have become more attractive.

Increases in public funds NOW deposits and core customer noninterest-bearing checking deposits drove overall deposit growth for the first nine months of 2011, while core customer certificates of deposit decreased. Noninterest-bearing deposits represented 17.32% of total deposits at September 30, 2012 as compared to 16.90% at December 31, 2011 and 16.05% at September 30, 2011.

The Company’s long-term strategy is to build the core customer deposit base, relying less on public funds deposits, which tend to be volatile, as a primary source of liquidity. Additional sources of deposits available to the Company are the traditional brokered CD market, which may be used when funding is needed within a short period of time, and reciprocal brokered CD markets which are used to provide enhanced FDIC coverage for customers with large certificate of deposit balances. Additionally, the Company uses repurchase agreements with certain commercial customers in an effort to provide them with better cash management tools.

The following table shows the deposit mix as of September 30, 2012, December 31, 2011, and September 30, 2011:

(Dollars in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Noninterest-bearing demand	$	233,684	$	231,718	$	222,042
NOW deposits	386,371		390,256		378,409
Money market deposits	216,620		197,849		179,138
Savings deposits	117,404		119,693		118,814
Certificates of deposit	378,445		415,380		466,785
Brokered certificates of deposit	16,950		16,567		18,671
Total	$	1,349,474	$	1,371,463	$	1,383,859

65

FIRST M & F CORPORATION

The following table shows the mix of public funds deposits as of September 30, 2012, December 31, 2011, and September 30, 2011:

(Dollars in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Noninterest-bearing demand	$	8,216	$	7,121	$	6,645
NOW deposits	162,547		165,711		155,460
Money market deposits	18,491		19,478		19,030
Savings deposits	251		336		329
Certificates of deposit	12,052		14,315		15,712
Brokered certificates of deposit	5,034		5,783		6,114
Total	$	206,591	$	212,744	$	203,290

Other borrowings decreased by $5.331 million from September 30, 2011 to September 30, 2012 and decreased by $4.017 million from December 31, 2011. The decreases in borrowings were primarily funded through liquidity provided by loan portfolio paydowns. Amounts of borrowings maturing within one year increased from 22.76% of other borrowings at December 31, 2011 to 25.80% at September 30, 2012. Management intends to continue to allow its Federal Home Loan Bank borrowings to decrease as they mature while deposits are used as a primary source of funding.

Equity

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 increased its capital position during the first three quarters of 2012 and 2011 primarily through the retention of earnings. The Company reduced the quarterly dividend rate to $.01 per share beginning in the second quarter of 2009 after maintaining a $.13 per share quarterly dividend rate from the second quarter of 2005 through the first quarter of 2009. The Company is restricted from increasing the dividend rate until its Community Development Capital Initiative (CDCI) preferred stock is redeemed.

Average year-to-date equity to assets was 7.16% at September 30, 2012, 6.89% at December 31, 2011 and 6.79% at September 30, 2011. Total asset growth has been constrained since the 2009 losses as capital has been rebuilt over time. Corporate strategies have been dominated primarily by capital growth and preservation and secondarily by asset and deposit growth strategies.

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

The Company registered 37.800 million shares in April 2012 to allow it the flexibility of raising capital sufficient to pay off its CDCI obligations and for other capital and liquidity management needs. Management does not have any immediate plans to raise additional capital through a common stock offering.

The Company’s stock is publicly traded on the NASDAQ Global Select Market, also providing an avenue for additional capital if it is needed. The Company’s shares traded at a rate of approximately 10,000 shares per day during the first nine months of 2012. The stock’s closing price was $7.42 per share on September 30, 2012.

The Company’s and Bank’s regulatory capital ratios at September 30, 2012 were in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.

66

FIRST M & F CORPORATION

The following table highlights certain regulatory capital ratios for the Company:

(Dollars in thousands)	September 30, 2012			December 31, 2011			September 30, 2011
Tier 1 capital	$	135,277		$	126,810		$	126,440
Total risk-based capital	149,994			141,434			141,057
Risk-weighted assets	1,175,456			1,169,553			1,167,836
Risk-based ratios:
Tier 1 capital	11.51		%	10.84		%	10.83		%
Total risk-based capital	12.76		%	12.09		%	12.08		%
Tier 1 leverage	8.81		%	8.17		%	8.01		%
Total capital to assets ratio	7.53		%	6.99		%	6.98		%

Interest Rate Risk and Liquidity Management

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 the volatility of net interest income. Responsibility for managing the Company’s program for controlling and monitoring interest rate risk and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. In addition to these monthly reviews, a quarterly sensitivity analysis is performed to determine the potential effects of changes in interest rates on the Company's net interest margin, net interest income and market value of equity. The Company generally designs strategies to keep the one-year change in net interest income no more than 10% lower than current levels based on interest rate shocks of 100 basis points down and 200 basis points up. The Committee also monitors all loan originations, excluding residential mortgages, with maturities of greater than five years. Management believes, at September 30, 2012, there is adequate flexibility to alter the current rate and maturity structures as necessary to minimize the exposure to changes in interest rates, should they occur. Although the Company has hedged it's floating rate subordinated debt, most interest rate risk mitigation strategies are carried out through pricing and product structures. The Company is currently in a negative gap position for assets and liabilities repricing within the next year. This generally means that for assets and liabilities maturing and repricing within the next 12 months, the Company is positioned for more liabilities to reprice than the amount of assets repricing.

The asset/liability committee further establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. The Company monitors liquid assets such as cash equivalents and unpledged marketable securities to assure that there is sufficient liquidity available to cover deposit maturities over a one month horizon plus other potential volatile deposit movements. The Company also runs longer-term sensitivity tests on the earning asset and liability cash flows under simulated conditions with interest rates moving up 200 basis points and down 100 basis points. Strategies are implemented to mitigate any indicated weaknesses. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. The Company has limited lines available through the Federal Reserve, the Federal Home Loan Bank and correspondent banks to meet anticipated liquidity needs.

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

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Credit Risk Management

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

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

The adequacy of the allowance for loan losses is evaluated quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by internal and external loan review personnel, past due status, collateral reviews, loan growth and loss history. As part of the allowance evaluation, certain impaired loans are tested to determine if individual impairment allowances are required. A loan is considered to be impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Impairment review meetings are held monthly to review existing and new impairments. Loans with high risk grades, generally implying a substandard classification, are considered impaired and therefore are selected for individual impairment allowance tests. Loan grades are a significant indicator in determining which loans to individually test for impairment amounts because the loan grading process incorporates past due status, payment history, customer financial condition and collateral value in assigning individual grades to loans. Nonaccrual loans are also generally selected for individual impairment allowance tests. Loans that have been modified in a troubled debt restructuring are also selected for individual impairment allowance tests. For collateral-dependent loans, those for which the repayment is expected to be provided solely by the underlying collateral, the impairment allowance is primarily based on the value of the related collateral. Otherwise, impairment allowance calculations are based on the estimated present value of expected cash flows discounted at the effective interest rate of the loan. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. The material estimates necessary in this process make it inherently subjective and make the estimates subject to significant changes and may add volatility to earnings as provisions are adjusted.

Loans not individually tested for impairment allowances are grouped into risk-rated pools and evaluated based on historical loss experience. Additionally, in determining the allowances for pools of loans, management considers specific qualitative external credit risk factors (“environmental factors”) that may not be reflected in historical loss rates such as: (1) potential disruptions in the real estate market and their effect on real estate concentrations; (2) trends in loan to value exception rates; (3) general economic conditions, including extending or worsening recessionary pressures; (4) past due rates; and (5) reviews of underwriting standards in our various markets. These and other environmental factors are reviewed on a quarterly basis. During the third quarter of 2011 the Company changed the number of periods included in the historical loss rate from thirteen years to five years. The thirteen year average previously used was also adjusted by two standard deviations to capture a higher percentage of probable losses. Given the higher variation and wider distribution of losses that can occur during any thirteen year historical period, two standard deviations were added to the mean to capture the potential losses that may have been distributed further from the mean but resulted from conditions that could reasonably re-occur. The five year average calculation includes more recent loss history, which management believes reflects current conditions better than the thirteen year calculation. The change in calculation, given the previous statistical adjustments to the thirteen year average, resulted in an immaterial difference.

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At the end of 2011, the average loss rates applied to pools of commercial loans and for real estate secured commercial and construction loans were adjusted for economic condition environmental factors related to (1) the lack of economic growth impacting small businesses in the Company's markets and (2) the lack of liquidity in the market for commercial real estate, especially concerning undeveloped properties. During the first quarter of 2012 the Company removed the environmental factor in the loss rate applied to pools of commercial loans not individually reviewed for impairment. During the third quarter of 2012 the Company added environmental factors of approximately 10 basis points to the commercial real estate loan pool loss rate and added 25 basis points to the commercial loan pool loss rate for economic uncertainty in the small business environment, reflecting slow sales growth in the Company's small business markets.

The Company experienced a large increase in the amount of past due and nonaccrual real estate-secured construction and commercial loans during 2008. The trend in nonaccrual and past due loans stabilized in the fourth quarter of 2009 and began its decline in 2011. Management addressed the problem of liquidating nonperforming loans by creating a special problem asset group within the organization in 2009, separate from the ongoing credit operations and lending activities of the Company. Problem loans, including large nonaccrual loans, have been assigned to this group of specialists with the intent of liquidating the loans or their collateral in an orderly fashion. Nonaccrual loans have moved downward from their high of $74.420 million in the second quarter of 2009 and fallen to $6.219 million at September 30, 2012. Management has made much progress recently in improving the credit quality of the portfolio as substandard and loss loans have fallen from 7.87% of loans held for investment at September 30, 2011 to 5.08% at September 30, 2012. Construction and development substandard and loss loans decreased from 29.14% of their outstanding balances to 19.31% and other commercial real estate substandard and loss loans decreased from 8.82% of their outstanding balances to 5.89% during the same period. The allowances for loans individually tested for impairment fell from $5.056 million at September 30, 2011 to $4.272 million at September 30, 2012. Moving forward, as old years are removed and recent years are added, the allowances related to risk pools of loans should also decline as the historical five year average loss rates decline, assuming that recent trends continue. The portfolio clean-up since 2008 came at the expense of higher net charge-offs. However, during 2012 net charge-offs have been $4.837 million as compared to $7.354 million for the first nine months of 2011. Approximately 36.90% of the net charge-off activity in 2012 was related to foreclosure transactions. Approximately 45.33% of the net charge-offs for all of 2011 were related to foreclosure transactions. Foreclosure volume increased every quarter during 2011, accelerating to $8.186 million for the fourth quarter. During the first nine months of 2012, $3.974 million of properties were foreclosed on.

The primary challenge during 2012 and beyond will be the liquidation of foreclosed properties. The Company sold $3.340 million of foreclosed properties for $3.172 million during the third quarter of 2012. During the third quarter of 2011 $2.574 million of properties were sold for $2.218 million. During the second quarter of 2012 $4.787 million of properties were sold for $4.292 million. Over the past twelve months $13.659 million of properties have been sold for approximately 91.78% of their book value. As sales have outpaced foreclosure activity in 2012, the Company faces the challenge of selling the remaining properties, with the most difficult task being the disposition of construction and land development properties which makes up over 75% of the balance of other real estate owned.

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The following table shows the nonaccrual loan balance trend since 2009, indicating a significant drop in numbers of nonaccrual loans as well as a reduction in the number and balances of large nonaccrual loans:

(Dollars in thousands)	09/30/12		12/31/11		09/30/11		12/31/10		12/31/09
Construction and land development:
Total number	3		10		16		22		54
Total balance	$	1,465	$	4,398	$	8,801	$	13,993	$	25,655
Number, $500 thousand or more	1		3		6		7		13
Balance, $500 thousand or more	$	600	$	2,989	$	6,927	$	10,553	$	19,297
Other commercial real estate:
Total number	12		14		17		26		18
Total balance	$	2,658	$	9,937	$	14,804	$	13,027	$	9,789
Number, $500 thousand or more	—		4		5		6		2
Balance, $500 thousand or more	$	—	$	8,185	$	12,465	$	10,152	$	3,496
1-4 family residential:
Total number	23		28		31		40		57
Total balance	$	1,467	$	1,896	$	2,166	$	3,863	$	4,490
Number, $500 thousand or more	—		—		—		1		1
Balance, $500 thousand or more	$	—	$	—	$	—	$	941	$	1,024
Total real estate:
Total number	38		52		64		88		129
Total balance	$	5,590	$	16,231	$	25,771	$	30,883	$	39,934
Number, $500 thousand or more	1		7		11		14		16
Balance, $500 thousand or more	$	600	$	11,174	$	19,392	$	21,646	$	23,817
Commercial, financial & agricultural:
Total number	11		17		15		23		33
Total balance	$	613	$	913	$	795	$	2,151	$	4,459
Number, $500 thousand or more	—		—		—		1		2
Balance, $500 thousand or more	$	—	$	—	$	—	$	784	$	2,411
Consumer:
Total number	4		5		6		10		10
Total balance	$	16	$	33	$	56	$	93	$	156
Number, $500 thousand or more	—		—		—		—		—
Balance, $500 thousand or more	$	—	$	—	$	—	$	—	$	—
Total portfolio:
Total number	53		74		85		121		172
Total balance	$	6,219	$	17,177	$	26,622	$	33,127	$	44,549
Number, $500 thousand or more	1		7		11		15		18
Balance, $500 thousand or more	$	600	$	11,174	$	19,392	$	22,430	$	26,228

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As the trend in nonaccrual real estate-secured loans has declined, individual impairment allowances have also declined since 2009. The following table shows a distribution of the totals for construction loans evaluated for impairment and the impairment allowances allocated to those loans at September 30, 2012 and December 31, 2011:

	September 30, 2012				December 31, 2011
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Non-accrual loans	$	1,465	$	63	$	4,398	$	400
Accruing loans with an allowance	3,766		1,102		7,155		1,350
Accruing loans without an allowance	5,892		—		6,606		—
Total	$	11,123	$	1,165	$	18,159	$	1,750

The following table shows a distribution of the totals for commercial real estate loans evaluated for impairment and the impairment allowances allocated to those loans at September 30, 2012 and December 31, 2011:

	September 30, 2012				December 31, 2011
(Dollars in thousands)	Loan Balance		Impairment Allowance		Loan Balance		Impairment Allowance
Non-accrual loans	$	2,658	$	348	$	9,937	$	477
Accruing loans with an allowance	14,580		1,834		4,495		417
Accruing loans without an allowance	12,043		—		26,338		—
Total	$	29,281	$	2,182	$	40,770	$	894

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

(Dollars in thousands)	Outstanding Balances		Past Due 30-89 Days And Still Accruing		Past Due 90 Days Or More And Still Accruing		Nonaccrual		Year-To-Date Net Charge-Offs (Recoveries)
Construction and development loans:
09/30/12	$	57,613	$	166	$	—	$	1,465	$	840
06/30/12	67,814		325		—		1,373		918
03/31/12	70,087		254		23		4,519		(263		)
12/31/11	69,325		603		72		4,398		1,970
09/30/11	83,100		1,147		—		8,801		743
Loans secured by 1-4 family properties:
09/30/12	$	234,825	$	2,275	$	77	$	1,467	$	241
06/30/12	226,110		2,232		81		1,864		241
03/31/12	224,989		2,810		87		2,352		(81		)
12/31/11	223,839		3,288		174		1,896		1,998
09/30/11	223,884		2,334		3		2,166		1,790
Commercial real estate-secured loans:
09/30/12	$	496,862	$	15,569	$	172	$	2,658	$	2,522
06/30/12	499,370		1,177		1,368		2,557		2,443
03/31/12	498,724		3,061		75		7,125		1,239
12/31/11	505,180		2,952		279		9,937		3,998
09/30/11	520,804		2,958		189		14,804		2,229

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

(Dollars in thousands)	September 30			December 31			September 30
	2012			2011			2011
Nonaccrual loans	$	6,219		$	14,604		$	26,622
Other real estate	28,002			34,636			32,722
Nonaccrual investment securities	644			646			509
Total non-performing assets	$	34,865		$	49,886		$	59,853
Past due 90 days or more and still accruing interest	$	408		$	245		$	252
Restructured loans (accruing)	16,784			19,077			19,712
Ratios:
Nonaccrual loans to loans	0.62		%	1.45		%	2.59		%
Past due 90 day loans to loans	0.04		%	0.02		%	0.02		%
Non-performing credit assets to loans and other real estate	3.29		%	4.72		%	5.60		%
Non-performing assets to assets	2.24		%	3.10		%	3.77		%

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

As the Company has worked to reduce nonaccrual loan balances, a natural byproduct has been an increase in real estate foreclosures. The slow economy and stagnant real estate markets have combined to impede the process of disposing of foreclosed properties. During the third quarter and first nine months of 2012, more properties were sold than were foreclosed on. The following table shows the activity in the other real estate properties and the progress to date.

	QTD			QTD			YTD
(Dollars in thousands)	September 30, 2012			September 30, 2011			September 30, 2012
Balance at beginning of period	$	31,077		$	30,650		$	36,952
Foreclosures	910			5,066			3,974
Third-party lien pay-offs	—			198			—
Improvements	—			52			323
Write downs	(645		)	(670		)	(2,281		)
Properties sold	(3,340		)	(2,574		)	(10,966		)
Balance at end of period	$	28,002		$	32,722		$	28,002

Construction properties are the largest segment of other real estate. These properties have been slow to move, as undeveloped properties have attracted very few interested buyers. The following table shows foreclosed real estate balances by type at September 30, 2012, December 31, 2011 and September 30, 2011.

(Dollars in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Construction and land development	$	20,131	$	22,773	$	20,974
Farmland	2,079		2,618		1,773
1-4 family residential	1,119		2,136		3,005
Multifamily residential	864		950		1,036
Nonfarm nonresidential	3,809		8,475		5,934
	$	28,002	$	36,952	$	32,722

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Off-Balance Sheet Arrangements

The Company’s primary off-balance sheet arrangements are in the form of loan commitments, operating lease commitments and an interest rate swap. At September 30, 2012, the Company had $134.106 million in unused loan commitments outstanding. Of these commitments, $89.993 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.

Letters of credit are used to facilitate a borrower’s business and are usually related to the acquisition of inventory or of assets to be used in the customer’s 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. At September 30, 2012, the Company had $3.726 million in financial standby letters of credit issued and outstanding.

Liabilities of $5 thousand at September 30, 2012, and $7 thousand at September 30, 2011, were recognized in other liabilities related to the obligation to stand ready to perform related to standby letters of credit.

The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $40.689 million at September 30, 2012. These commitments are accounted for as derivatives and are marked to fair value with changes in fair value recorded in mortgage banking income. At September 30, 2012, mortgage origination-related derivatives with positive fair values of $756 thousand were included in other assets, and derivatives with negative fair values of $91 thousand were included in other liabilities.

The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At September 30, 2012, the Company had $64.195 million in locked forward sales agreements in place. Forward sale-related derivatives with positive fair values of $106 thousand were included in other assets, and derivatives with negative fair values of $410 thousand were included in other liabilities.

Mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Company may also be required to repurchase mortgages that do not conform to FNMA or FHA underwriting standards or that contain critical documentation errors or fraud. The Company only originates for sale mortgages that conform to FNMA and FHA underwriting guidelines. Mortgages sold that were still in the recourse period were $78.845 million at September 30, 2012. A recourse liability of $209 thousand was recorded for these mortgages as of September 30, 2012.

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

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

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

In November 2010 the Company entered into a forward-starting interest rate swap designed to hedge the variability of cash flows on the quarterly interest payments of the junior subordinated debentures, issued in relation to a trust preferred security financing in 2006, that switched in March 2011 from a fixed-rate of 6.44% to a floating rate of 3-month LIBOR plus 1.33%. The interest rate swap has a notional value of $30 million which is equivalent to the net principal balance of the junior subordinated debentures. The effective date of the swap was March 15, 2011 with an expiration date of March 15, 2018.

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Critical Accounting Policies

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

(1) Allowance for loan losses

(2) Fair value

(3) Contingent liabilities

(4) Income taxes

Allowance for loan losses

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

Management of the Company evaluates many factors in determining the estimate for the allowance for loan losses. Management reviews loan quality on an ongoing basis to determine the collectability of individual loans and reflects that collectability by assigning loan grades to individual credits. The grades generally determine how closely a loan will be monitored on an ongoing basis. A customer’s payment history, financial statements, cash flow patterns and collateral, among other factors, are reviewed to determine if the loan has potential losses. Such information is used to determine if individual loans are impaired and to group remaining loans into risk pools. A loan is impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Generally, all loans (1) risk-rated as substandard, doubtful or loss, (2) in nonaccrual status or (3) classified as troubled debt restructurings are considered to be impaired and are therefore individually tested for impairment allowances. Impairment estimates may be based on discounted cash flows or collateral values. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. Historical loan losses by loan type and loan grade are also a significant factor in estimating future losses when applied to the risk pools of loans not individually tested for impairment allowances. Various external environmental factors are also considered in estimating the allowance for pools of loans. Concentrations of credit by loan type and collateral type are also reviewed to estimate exposures and risks of loss for loans aggregately evaluated in risk pools. 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 pools of loans to economic fluctuations. The Company has a loan review department that audits types of loans as well as geographic segments to determine credit problems and loan policy violations that require the attention of management. All of these factors are used to determine the adequacy of the allowance for loan losses and adjust its balance accordingly.

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

Fair value

Certain of the Company’s assets and liabilities are financial instruments carried at fair value. This includes securities available for sale, mortgage-related derivatives and interest rate swaps. Most of the assets and liabilities carried at fair value are based on either quoted market prices, market prices for similar instruments or market data for the instruments being valued. At September 30, 2012, approximately 1% of assets and liabilities measured at fair value were based on significant unobservable inputs.

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

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

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

The Company enters into interest rate swaps. Interest rate swaps are valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using rates derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

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

Contingent liabilities

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

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

Income taxes

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

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

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

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Recent Accounting Pronouncements

Accounting Standards Update No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements." ASU 2011-03 provides guidance related to the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 clarifies the guidance related to whether an entity has maintained effective control over transferred assets and therefore must treat the transaction as a financing rather than as a sale. ASU 2011-03 provides that the criterion pertaining to an exchange of collateral should not be a determining factor in assessing effective control. The assessment of effective control must focus on a transferor's contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. Therefore, the amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 became effective for the Company as of January 1, 2012. Adoption of ASU 2011-03 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." ASU 2011-04 clarifies how fair values should be measured for instruments classified in stockholders' equity and under what circumstances premiums and discounts should be applied in fair value measurements. The guidance also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks or counterparty credit risks. Required new disclosures for financial instruments classified as Level 3 fair values include (1) quantitative information about unobservable inputs used in measuring fair values, (2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs and (3) a description of the valuation processes used. ASU 2011-04 also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair value is required to be disclosed. ASU 2011-04 became effective for the Company prospectively for interim and annual periods beginning on January 1, 2012. Adoption of ASU 2011-04 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income." ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU 2011-05 became effective for the Company retrospectively for interim and annual periods beginning on January 1, 2012. Certain provisions related to the presentation of reclassification adjustments were deferred by ASU 2011-12 as noted below. Adoption of ASU 2011-05 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires the disclosure of both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for interim and annual periods beginning on January 1, 2013. Adoption of ASU 2011-11 is not expected to have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 became effective concurrent with the effective date of ASU 2011-05.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Market risk comes in the form of risk to the net interest income of the Company as well as to the market values of the financial assets and liabilities on the balance sheet and the values of off-balance sheet activities such as commitments. The Company monitors interest rate risk on a monthly basis with quarterly sensitivity analyses of net interest income and the economic value of equity.

Interest rate shock analysis shows that the Company will experience a 0.45% decrease over 12 months in its net interest income with a gradual (12 month ramp) and sustained 100 basis point decrease in interest rates. A gradual and sustained increase in interest rates of 200 basis points will result in a 0.66% increase in net interest income.

An analysis of the change in market value of equity shows how an interest rate shock will affect the difference between the market value of assets and the market value of liabilities. With all financial instruments being stated at market value, the market value of equity will increase by 9.70% with an immediate and sustained increase in interest rates of 200 basis points. The market value of equity will decrease by 15.12% with an immediate and sustained decrease in interest rates of 100 basis points.

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Item 4 - Controls and Procedures

The Company conducted an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2012. The Company's disclosure controls and procedures are designed to ensure that information 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 rules and forms of the SEC, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2012.

There have been no changes to the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1 - Legal Proceedings

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

Item 1A – Risk Factors

There have been no material changes in the risk factors previously disclosed under Part I - Item 1A of the Company's 2011 Form 10-K.

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

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits

3.1	Articles of Incorporation of the Registrant.  Incorporated herein by reference to Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.2	Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.4	Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
4.1	Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.1	First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.
10.2	Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.
10.3	Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.4	Form of Preferred Stock Certificate.  Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.5	Side Letter Agreement.  Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.6	CDCI Letter Agreement dated September 29, 2010. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
10.7	Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
11	Computation of Earnings Per Share – Filed herewith as Note 13 to the consolidated financial statements.
31	Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer.
32	Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer.

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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.

Date: November 14, 2012

BY:	/s/ Hugh S. Potts, Jr.	BY:	/s/ John G. Copeland
	Hugh S. Potts, Jr.		John G. Copeland
	Chairman of the Board and Chief Executive Officer (principal executive officer)		Executive Vice President and Chief Financial Officer (principal financial officer)
		BY:	/s/ Robert C. Thompson, III
			Robert C. Thompson, III
			Vice President – Accounting Policy (principal accounting officer)

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EXHIBIT INDEX

3.1	Articles of Incorporation of the Registrant.  Incorporated herein by reference to Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.2	Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
3.3	By-laws of the Registrant, as amended. Filed as Exhibit 3-b to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3.4	Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
4.1	Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.1	First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.
10.2	Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.
10.3	Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.4	Form of Preferred Stock Certificate.  Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.5	Side Letter Agreement.  Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
10.6	CDCI Letter Agreement dated September 29, 2010. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
10.7	Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
11	Computation of Earnings Per Share – Filed herewith as Note 13 to the consolidated financial statements.
31	Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer.
32	Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer.

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